NetFlix 2007 Annual Report Download - page 40

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The increase in cost of subscription revenues in absolute dollars for 2006 as compared to 2005 was
primarily attributable to the following factors:
• The number of DVDs mailed to paying subscribers increased 42%. This was driven by a 60% increase in
the number of average paying subscribers offset by a slight decline in monthly movie rentals per average
paying subscriber attributed to the increased popularity of our lower priced plans.
• Postage and packaging expenses increased by 48%. This was primarily attributable to the increase in the
number of DVDs mailed to paying subscribers, as well as the first class postage rate increase of 2 cents
that was effective January 8, 2006.
• DVD amortization increased by 47% primarily due to increased acquisitions for our DVD library.
• Revenue sharing expenses increased by 10%. This increase was primarily attributable to the increase in
the number of average paying subscribers offset by a decrease in the percentage of DVDs subject to
revenue sharing agreements mailed to paying subscribers.
Fulfillment Expenses
Year Ended December 31,
2007 2006 2005
(in thousands, except percentages)
Fulfillment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,761 $94,364 $71,987
As a percentage of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1% 9.5% 10.6%
Percentage change over prior period . . . . . . . . . . . . . . . . . . . . . . . . 29.0% 31.1%
The increase in fulfillment expenses in absolute dollars in 2007 as compared to 2006 was primarily
attributable to an increase in personnel-related costs resulting from the higher volume of activities in our
customer service and shipping centers, coupled with higher credit card fees as a result of 32% growth in the
average number of paying subscribers. In addition, the increase in fulfillment expenses was attributable to an
increase in facility-related costs resulting from the expansion of our customer service center, the expansion of
certain of our shipping centers and the addition of new ones.
The increase in fulfillment expenses in absolute dollars in 2006 as compared to 2005 was primarily
attributable to an increase in personnel-related costs resulting from the higher volume of activities in our
customer service and shipping centers, coupled with higher credit card fees as a result of 60% growth in the
average number of paying subscribers. In addition, the increase in fulfillment expenses was attributable to an
increase in facility-related costs resulting from the expansion of certain of our shipping centers and the addition
of new ones.
We anticipate that fulfillment expenses will increase in 2008 due to higher volume of shipped discs and
continued expansion of our network of distribution centers.
Gross Margin
Year Ended December 31,
2007 2006 2005
(in thousands, except percentages)
Grossprofit.......................................... $419,172 $369,675 $216,438
Grossmargin ........................................ 34.8% 37.1% 31.7%
The decrease in gross margin in 2007 as compared to 2006 was primarily due to an increase in postage rates
effective May 2007 and a reduction in the prices of our most popular subscription plans during the second quarter
of 2007. In addition, costs related to our instant-watching feature have been included in cost of subscriptions
beginning January 2007.
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