NetFlix 2008 Annual Report Download

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Table of contents

  • Page 1
    2008 ANNUAL REPORT Play Add

  • Page 2
    ... Annual Report Subscribers (in thousands) Revenue (in millions) Net Income (in millions) 9,390 $1,205 7,479 $997 6,316 $1,365 $83 $67 $49 $682 4,179 $42 2005 2006 2007 2008 2005 2006 2007 2008 2005* 2006 2007 2008 * 2005 Net Income includes the benefit of realized deferred tax...

  • Page 3
    ... devices. We remain focused on our long-term goals: To be a great Internet movie service by combining DVD-by-mail with Internet streaming; and to deliver growing EPS and subscribers every year. With a service our subscribers love and recommend, the skill, commitment and creativity of our employees...

  • Page 4
    ... 31, 2008 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-49802 (Exact name of Registrant as specified in its charter) Netflix, Inc. 100 Winchester Circle Los Gatos, California 95032...

  • Page 5
    ... Matters and Issuer Purchases of Equity Securities ...Selected Financial Data ...Management's Discussion and Analysis of Financial Condition and Results of Operations ...Quantitative and Qualitative Disclosures about Market Risk ...Financial Statements and Supplementary Data ...Changes in and...

  • Page 6
    ... plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. We provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices. Subscribers select titles at our Web site aided by our proprietary recommendation service...

  • Page 7
    ...movie theaters, airlines, hotels and in-home. In-home distribution channels include DVD rental and retail outlets and web sites, cable, satellite and telecommunication providers offering basic and premium television, pay-per-view, and video-on-demand ("VOD") and Internet delivery. Currently, studios...

  • Page 8
    ... shipping fees and no pay-per-view fees for a fixed monthly price. We merchandise titles in easy-to-recognize lists including new releases, by genre and other targeted categories. We also offer more than 12,000 streaming content choices that can be watched instantly. Our convenient, easy-to-use Web...

  • Page 9
    ... of our subscribers. We use random control testing extensively, including testing service levels, plans, promotions and pricing. Merchandising We use our proprietary recommendation service along with other data, such as viewing history and inventory levels, to determine which titles are presented...

  • Page 10
    ...the studios movies in Netflix promotional advertising. We believe that our paid marketing efforts are significantly enhanced by the benefits of word-of-mouth advertising, our subscriber referrals and our active public relations programs. Content Acquisition We obtain content through direct purchases...

  • Page 11
    ... service marks for the Netflix name and have filed applications for additional trademarks and service marks. Our software, the content of our Web site and other material which we create are protected by copyright. We also protect certain details about our business methods, processes and strategies...

  • Page 12
    ... this Annual Report on Form 10-K, "Netflix," the "Company," "we," "us," "our" and the "registrant" refer to Netflix, Inc. Our investor relations Web site is located at http://ir.netflix.com. We make available, free of charge, on our investor relations Web site under "SEC Filings," our Annual Reports...

  • Page 13
    ... service levels, pricing and related features of competitors to our service may adversely impact our ability to attract subscribers. Competitors include movie retail stores, DVD rental outlets and kiosk services, Internet content providers' online DVD subscription rental web sites and video package...

  • Page 14
    ..., aggressive pricing policies and devote substantially more resources to marketing, Web site and systems development than we do. There can be no assurance that we will be able to compete effectively against current or new competitors at our existing pricing levels or at even lower price points in...

  • Page 15
    ... to engage a number of partners to offer instant streaming of content from Netflix to various devices. We currently offer subscribers the ability to receive streaming content through their PCs, Macs and other devices, including the Xbox 360, Internet connected Blu-ray players from LG Electronics...

  • Page 16
    ... service in ways that may impact subscriber movie usage. Such adjustments include new Web site features and merchandising practices, improvements in the technology that enable subscribers to instantly watch movies and TV episodes, an expanded DVD distribution network and software and process changes...

  • Page 17
    ... means of distributing titles, such as VOD. From time to time, our subscribers express dissatisfaction with our service, including among other things, our inventory allocation, delivery processing and service interruptions. Furthermore, third party devices that enable instant streaming of movies and...

  • Page 18
    .... If we were to see a significant increase in the number of Blu-ray DVDs we ship or an increase in the percentage of Blu-ray DVDs our subscribers take and the damage rates remained higher than standard definition DVDs, our gross margins, profitability and cash flow could be adversely affected. 13

  • Page 19
    ... expire on terms favorable to us, or if the cost of obtaining titles on a wholesale basis increases, our gross margins may be adversely affected. We obtain DVDs through a mix of revenue sharing agreements and direct purchases. The type of agreement depends on the economic terms we can negotiate as...

  • Page 20
    ..., or with the Internet in general, could make our Web site unavailable and hinder our ability to fulfill selections. For example, in August 2008, we suffered a service interruption that impacted our ability to ship and receive DVDs as well as stream movies to our subscribers. Much of our software is...

  • Page 21
    ... our business and results of operations. Our subscribers pay for our subscription services predominately using credit cards and debit cards. Our acceptance of these payment methods requires our payment of certain fees. From time to time, these fees may increase, either as a result of rate changes by...

  • Page 22
    ... to attract subscribers may be adversely affected. Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our Web site, our recommendation service, title selection processes and marketing activities. Trademark, copyright...

  • Page 23
    ... amount of our management's time and attention and could negatively affect our business operations and financial position. Changes in securities laws and regulations have increased and may continue to increase our costs. Changes in the laws and regulations affecting public companies, including the...

  • Page 24
    ... of securities analysts, investors and the financial community; • announcements of developments affecting our business, systems or expansion plans by us or others; • competition, including the introduction of new competitors, their pricing strategies and services; • market volatility...

  • Page 25
    ...nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of our revenues, gross margin, operating expenses, number of paying subscribers, number of DVDs shipped per day and other financial and operating data may differ materially...

  • Page 26
    Item 3. Legal Proceedings Information with respect to this item may be found in Note 5 of the Notes to the Consolidated Financial Statements in Item 8, which information is incorporated herein by reference. Item 4. None. Submission of Matters to a Vote of Securities Holders 21

  • Page 27
    ...symbol "NFLX" since our initial public offering on May 23, 2002. The following table sets forth the intraday high and low sales prices per share of our common stock for the periods indicated, as reported by the NASDAQ Global Select Market. 2008 High Low High 2007 Low First quarter ...Second quarter...

  • Page 28
    ..." under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings. The following graph compares, for the five year period ended December 31, 2008, the total cumulative stockholder return on the Company's common stock with the total cumulative return of the...

  • Page 29
    ...Securities Stock repurchases during the three months ended December 31, 2008 were as follows: Total Number of Shares Purchased as Part of Publicly Maximum Dollar Value Total Number of Average Price Announced that May Yet Be Purchased Shares Purchased Paid per Share Programs Under the Program Period...

  • Page 30
    ...610 2,716 37.02 (4) Short-term investments are comprised of corporate debt securities, government and agency securities and asset and mortgage-backed securities. (5) Subscriber acquisition cost is defined as total marketing expenses divided by total gross subscriber additions during the period. 25

  • Page 31
    ... plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. We provide subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices. Subscribers select titles at our Web site aided by our proprietary recommendation service...

  • Page 32
    ... through direct purchases, revenue sharing agreements or license agreements. We acquire DVD content for the purpose of rental to our subscribers and earning subscription rental revenues, and, as such, we consider our DVD library to be a productive asset. Accordingly, we classify our DVD library as...

  • Page 33
    ... DVD direct purchase agreements with studios provide for volume purchase discounts or rebates based on achieving specified performance levels. Volume purchase discounts are recorded as a reduction of DVD library when earned. We accrue for rebates as earned based on historical title performance...

  • Page 34
    ... is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R). Income Taxes We record a tax provision for the anticipated tax consequences of our reported results of operations using the asset and liability...

  • Page 35
    ... software we use to run our Web site and store our data. Marketing. Marketing expenses consist primarily of advertising expenses. Advertising expenses include marketing program expenditures and other promotional activities, including allocated costs of revenues relating to free trial periods...

  • Page 36
    ...Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Year Ended December 31, 2008 2007 2006 Revenues ...Costs of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross profit ...Operating expenses: Technology and development ...Marketing...

  • Page 37
    ... DVDs mailed to paying subscribers and increases in the rates of first class postage in May 2007 and May 2008. • Content expenses increased by 7%. This increase was primarily attributable to the increased investments in streaming content in 2008, as well as an increase in DVD revenue sharing costs...

  • Page 38
    ...average number of paying subscribers. In addition, the increase in fulfillment expenses was attributable to an increase in facility-related costs resulting from the addition of new shipping centers, and for 2007, the expansion of our customer service center. Gross Margin Year Ended December 31, 2008...

  • Page 39
    ... in direct mail and inserts. In the second half of 2007, we lowered prices on our most popular subscription plans and decided to partially offset the cost of our investment in lower prices by reducing our spending on marketing programs. Subscriber acquisition cost decreased in 2008 as compared...

  • Page 40
    ... of FASB Statement No. 26 and Technical Bulletin No. 79-11 ("SFAS 98"), which causes Netflix to be considered the owner (for accounting purposes) of the two buildings. Accordingly, we have recorded assets on our balance sheet for the costs paid by our lessor to construct our headquarters facilities...

  • Page 41
    ... issuance of common stock. Our primary uses of cash include our stock repurchase programs, shipping and packaging expenses, the acquisition of content, capital expenditures related to IT and automation equipment for operations, marketing and fulfillment expenses. In 2009, operating cash flows will...

  • Page 42
    ... purchase additional titles in order to support our larger subscriber base. The decrease in net changes in operating assets and liabilities was mainly driven by acquisitions of content library related to our streaming content, as we continued to increase our investments in streaming content in 2008...

  • Page 43
    ...231 $16,666 $1,439 - - $1,439 (1) Other purchase obligations relate primarily to acquisitions for our content library. License Agreements In addition to the above contractual obligations, we have certain license agreements with studios that include a maximum number of titles that we may or may not...

  • Page 44
    ... Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning...

  • Page 45
    ... this Annual Report on Form 10-K were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified...

  • Page 46
    ... in Rule 13a-15(f) of the Securities Exchange Act of 1934 as amended (the Exchange Act)). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of...

  • Page 47
    ... Management and Related Stockholder Matters Information required by this item is incorporated by reference from information contained under the sections "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the Annual...

  • Page 48
    ... Statements: The financial statements are filed as part of this Annual Report on Form 10-K under "Item 8. Financial Statements and Supplementary Data." (2) Financial Statement Schedules: The financial statement schedules are omitted as they are either not applicable or the information required...

  • Page 49
    ... are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings. Indicates a management contract or compensatory plan †44

  • Page 50
    NETFLIX, INC. INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2008 and 2007 ...Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006 ...Consolidated Statements of ...

  • Page 51
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Netflix, Inc.: We have audited the accompanying consolidated balance sheets of Netflix, Inc. and subsidiary (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of ...

  • Page 52
    NETFLIX, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) As of December 31, 2008 2007 Assets Current assets: Cash and cash equivalents ...Short-term investments ...Prepaid expenses ...Prepaid revenue sharing expenses ...Current content library, net ...Deferred tax ...

  • Page 53
    ..., INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, 2008 2007 2006 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses* ...Total cost of revenues ...Gross profit ...Operating expenses: Technology and development* ...Marketing...

  • Page 54
    ...for-sale securities, net of tax ...- - F-5 Comprehensive income ... Exercise of options ...828,824 Issuance of common stock under employee stock purchase plan ...205,416 Repurchases and retirement of common stock ...(4,733,788) Stock-based compensation expense ...- Stock option income tax benefits...

  • Page 55
    ... of content library ...Proceeds from sale of DVDs ...Investment in business ...Other assets ...Net cash used in investing activities ...Cash flows from financing activities: Principal payments of lease financing obligations ...Proceeds from issuance of common stock ...Excess tax benefits from stock...

  • Page 56
    ...due dates, no late fees, no shipping fees, and no pay-per-view fees. The Company provides subscribers access to over 100,000 DVD and Blu-ray titles plus more than 12,000 streaming content choices. Subscribers select titles at the Company's Web site aided by its proprietary recommendation service and...

  • Page 57
    ... and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the estimate of useful lives and residual value of its content library; the valuation of stock-based compensation; and the recognition and measurement of income tax assets and liabilities...

  • Page 58
    NETFLIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Content Library The Company obtains content from studios and distributors through direct purchases, revenue sharing agreements or license agreements. The Company acquires DVD content for the purpose of rental to its subscribers and...

  • Page 59
    ... book value of capitalized software costs is not significant as of December 31, 2008 and 2007. Revenue Recognition Subscription revenues are recognized ratably over each subscriber's monthly subscription period. Refunds to subscribers are recorded as a reduction of revenues. Revenues from sales of...

  • Page 60
    ... capitalized software used to run its Web site and store its data. Marketing Marketing expenses consist primarily of advertising expenses. Advertising expenses include marketing program expenditures and other promotional activities, including allocated costs of revenues related to free trial periods...

  • Page 61
    ... realized upon settlement. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. See Note 8 to the consolidated financial statements for further information regarding income taxes Comprehensive Income The Company reports comprehensive income or loss...

  • Page 62
    ...Other Intangible Assets." This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning...

  • Page 63
    ... investments were classified as available-for-sale securities and are reported at fair value as follows: Gross Amortized Cost December 31, 2008 Gross Gross Unrealized Unrealized Gains Losses (in thousands) Estimated Fair Value Corporate debt securities ...Government and agency securities ...Asset...

  • Page 64
    ... and the reporting entity's own assumptions about market participants and pricing. The Company has no material Level 3 financial assets measured at fair value in the consolidated balance sheets as of December 31, 2008. The hierarchy level assigned to each security in the Company's available-for-sale...

  • Page 65
    NETFLIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 3. Balance Sheet Components Content Library, Net Content library and accumulated amortization consisted of the following: As of December 31, 2008 2007 (in thousands) Content library, gross ...Less accumulated amortization ...Less...

  • Page 66
    ... expense related to intangible assets was $0.2 million, $0.2 million and $0.1 million respectively for the years ended December 31, 2008, 2007, and 2006. Additionally, the Company expensed $0.4 million related to historical use of patents acquired in the year ended December 31, 2008. The annual...

  • Page 67
    ... no warrants issued in 2007 or 2008. 5. Commitments and Contingencies The Company leases facilities under non-cancelable operating leases with various expiration dates through 2016. The facilities generally require the Company to pay property taxes, insurance and maintenance costs. Further, several...

  • Page 68
    ... entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices. The complaints, which assert violation of federal and/or state antitrust laws, seek injunctive relief, costs (including attorneys' fees...

  • Page 69
    ... Action No 2:07-cv-562-LED. The complaint alleges that the Company infringed U.S. Patent Nos. 5,894,554 and 6,415,335 B1 entitled "System For Managing Dynamic Web Page Generation Requests by Intercepting Request at Web Server and Routing to Page Server Thereby Releasing Web Server to Process Other...

  • Page 70
    ... reserved a total of 1,166,666 shares of common stock for issuance. The 2002 Employee Stock Purchase Plan also provides for annual increases in the number of shares available for issuance on the first day of each year, beginning with 2003, equal to the lesser of: • 2% of the outstanding shares of...

  • Page 71
    ... 2002 Stock Plan. A summary of the activities related to the Company's options is as follows: Weighted-Average Options Outstanding Remaining Aggregate Shares Available Number of Weighted-Average Contractual Term Intrinsic Value for Grant Shares Exercise Price (in Years) (in Thousands) Balances as...

  • Page 72
    NETFLIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) exercised their options on December 31, 2008. This amount changes based on the fair market value of the Company's common stock. Total intrinsic value of options exercised for the years ended December 31, 2008, 2007 and 2006 was $18...

  • Page 73
    ... rate as options are fully vested upon grant date. The weighted-average fair value of employee stock options granted during 2008, 2007 and 2006 was $12.25, $9.68 and $10.76 per share, respectively. The weighted-average fair value of shares granted under the employee stock purchase plan during 2008...

  • Page 74
    ..., net of tax, related to stock option plans and employee stock purchases under SFAS 123R which was allocated as follows: Year Ended December 31, 2008 2007 2006 (in thousands) Fulfillment expenses ...Technology and development ...Marketing ...General and administrative ...Stock-based compensation...

  • Page 75
    ...in the Consolidated Balance Sheet. The aggregate changes in the Company's total gross amount of unrecognized tax benefits are summarized as follows (in thousands): Balance as of December 31, 2007 ...Increases related to tax positions taken during the current period ...Balance as of December 31, 2008...

  • Page 76
    ... certain amounts as reported in the fiscal 2008 and 2007 Interim Consolidated Financial Statements have been revised to reflect the correction of immaterial errors associated with lease accounting and the application of SFAS 63 to streaming content. The selected quarterly financial data shown in the...

  • Page 77
    ... in investing activities ...Net cash (used in) provided by financing activities ...Total revenues ...Gross profit ...Net income ...Net income per share: Basic ...Diluted ...Subscribers at end of period ...ADJUSTMENTS (in thousands, except per share amounts) 2008 Total current assets ...Total assets...

  • Page 78
    ...-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the...

  • Page 79
    ... with each of its executive officers and directors 2002 Employee Stock Purchase Plan Amended and Restated 1997 Stock Plan Amended and Restated 2002 Stock Plan Amended and Restated Stockholders' Rights Agreement Lease between Sobrato Land Holdings and Netflix, Inc. Lease between Sobrato Interests...

  • Page 80
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 81
    ... in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who...

  • Page 82
    ... the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such report fairly presents, in all material respects, the financial condition...

  • Page 83
    ... STOCK LISTING Netï¬,ix, Inc. common stock trades on the Nasdaq Stock Market under the symbol NFLX. For additional copies of this report or other financial information: http://ir.netï¬,ix.com Email: ir@netï¬,ix.com INVESTOR RELATIONS Netï¬,ix, Inc. 100 Winchester Circle Los Gatos, CA 95032 Phone...

  • Page 84
    Netflix, Inc. | 100 Winchester Circle, Los Gatos, CA 95032 | www.netflix.com