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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ÍANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
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
Netflix, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 77-0467272
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
100 Winchester Circle
Los Gatos, California 95032
(Address and zip code of principal executive offices)
(408) 540-3700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Common stock, $0.001 par value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ÍNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Í
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ÍNo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ÍNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. Í
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer ÍAccelerated filer Non-accelerated filer Smaller reporting company
(do not check if smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes No Í
As of June 30, 2010, the aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales
price for the registrant’s common stock, as reported in the NASDAQ Global Select Market System, was $4,018,312,143. Shares of
common stock beneficially owned by each executive officer and director of the Registrant and by each person known by the Registrant to
beneficially own 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of January 31, 2011, there were 52,890,638 shares of the registrant’s common stock, par value $0.001, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant’s Proxy Statement for Registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.

Table of contents

  • Page 1
    ... aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sales price for the registrant's common stock, as reported in the NASDAQ Global Select Market System, was $4,018,312,143. Shares of common stock beneficially owned by each executive officer and...

  • Page 2
    ... Item 15. Exhibits and Financial Statement Schedules ...41 Directors, Executive Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions and Director...

  • Page 3
    ... of Internet delivery of content; the market opportunity for streaming content; our advantage of focus within the subscription segment of the entertainment video market; gross margin; liquidity; revenue per average paying subscriber; impacts relating to our pricing strategy; our content library...

  • Page 4
    ...fixed-fee licenses, revenue sharing agreements and direct purchases. We market our service through various channels, including online advertising, broad-based media, such as television and radio, as well as various strategic partnerships. In connection with marketing the service, we offer free-trial...

  • Page 5
    ... principal executive offices are located at 100 Winchester Circle, Los Gatos, California 95032, and our telephone number is (408) 540-3700. We maintain a Web site at www.netflix.com . The contents of our Web site are not incorporated in, or otherwise to be regarded as part of, this Annual Report on...

  • Page 6
    .... The market for entertainment video is intensely competitive and subject to rapid change. New technologies and evolving business models for delivery of entertainment video continue to develop at a fast pace. The growth of Internet-connected devices, including television sets, Blu-ray players and...

  • Page 7
    .... Although we provide our own Internet-based delivery of content allowing our subscribers to stream certain TV shows and movies to their Internet-connected televisions and other devices, if other providers of entertainment video address the changes in consumer viewing habits in a manner that is...

  • Page 8
    and permission-based e-mails, as well as our active affiliate program. We also engage our consumer electronics partners to generate new subscribers for our service. In addition, we have engaged in various offline marketing programs, including TV and radio advertising, direct mail and print campaigns...

  • Page 9
    ... 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 Internet-connected devices, including Blu-ray players and TVs, digital video players, game consoles...

  • Page 10
    ...try to limit the affects of the First Sale Doctrine, our business could be adversely affected. For example, we have entered into agreements with several studios to delay the availability of new release DVDs for rental for a brief period of time following the DVDs release to the retail market and, in...

  • Page 11
    ... be subject to increased costs arising from our acquisition of DVD content and our subscribers' demand for DVD titles that could adversely affect our operations and financial performance We obtain DVDs through a mix of revenue sharing agreements and direct purchases. The type of agreement we utilize...

  • Page 12
    ... utilize third-party content delivery networks to help us stream TV shows and movies in high volume to Netflix subscribers over the Internet. Problems faced by our third-party Web hosting, cloud computing, or content delivery network providers, including technological or business-related disruptions...

  • Page 13
    ... affect our operating results. We rely exclusively on the U.S. Postal Service to deliver DVDs from our shipping centers and to return DVDs to us from our subscribers. We are subject to risks associated with using the public mail system to meet our shipping needs, including delays or disruptions...

  • Page 14
    ... our subscriber acquisition and retention could be negatively impacted. For example, in late 2010, Comcast informed Level 3 Communications that it would require Level 3 to pay for the ability to access Comcast's network. Given that much of the traffic being requested by Comcast customers is Netflix...

  • Page 15
    .... 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 the payment processing companies or as...

  • Page 16
    ... selection processes and marketing activities. Trademark, copyright, patent and other intellectual property rights are important to us and other companies. Our intellectual property rights extend to our technology, business processes and the content on our Web site. We use the intellectual property...

  • Page 17
    ... affect our financial condition and future financial results. As of December 31, 2010, we have $200 million in 8.50% senior notes outstanding. Risks relating to our long-term indebtedness include: • Requiring us to dedicate a portion of our cash flow from operations to payments on our indebtedness...

  • Page 18
    ... course of business. The terms of indentures governing our outstanding senior notes allow us to incur additional debt subject to certain limitations. If new debt is added to current debt levels, the risks described above could intensify. The agreements governing our indebtedness contain various...

  • Page 19
    ... 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 in general; • the level of demand for our stock...

  • Page 20
    ... Hills, California ... 49,000 20,000 April 2016 August 2015 Corporate office, general and administrative, marketing and technology and development Receiving for the Company and storage center, processing and shipping center for the Columbus Area Customer service center Content acquisition, general...

  • Page 21
    ...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. 2010 High Low High 2009 Low First quarter ...Second quarter...

  • Page 22
    ... industry, including Internet content and access providers, Internet software and services companies and e-commerce companies. Historical stock price performance should not be relied upon as an indication of future stock price performance: Netflix S&P North American Technology Internet Index NASDAQ...

  • Page 23
    ... Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplementary Data. 2010 Year ended December 31, 2009 2008 2007 (1) (in thousands, except per share data) 2006 Revenues ...Total cost of revenues ...Operating income...

  • Page 24
    ... by total gross subscriber additions during the period. Item 7. Overview With 20 million subscribers as of December 31, 2010, we are the world's leading Internet subscription service for enjoying TV shows and movies. Our subscribers can instantly watch unlimited TV shows and movies streamed over...

  • Page 25
    ... Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Year Ended December 31, 2010 2009 2008 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross margin ...Operating expenses: Technology and development ...Marketing...

  • Page 26
    ... proposition of streaming and DVDs by mail for one low price and other benefits of our service. This increase was offset in part by a 3.3% decline in average monthly revenue per paying subscriber, resulting from the continued growth in our lower priced subscription plans. The total number of average...

  • Page 27
    ... for the mailers and all costs associated with streaming content over the Internet. We utilize third-party content delivery networks to help us efficiently stream content in high volume to our subscribers over the Internet. Year ended December 31, Change 2010 2009 2010 vs. 2009 (in thousands, except...

  • Page 28
    ...• Shipping and customer service centers expenses increased $10.5 million primarily due to a 14.0% increase in headcount to support the higher volume of content delivery and growth in subscribers. • Credit card fees increased $10.2 million as a result of the 22.4% growth in revenues. Gross Margin...

  • Page 29
    ... software systems. Technology and development expenses also include costs associated with computer hardware and software, as well as certain costs paid for third-party Internet-based or "cloud" computing services used in connection with our business. Change Year ended December 31, 2010 2009 2010 vs...

  • Page 30
    ...as television and online advertising as well as, allocated costs of revenues relating to free trial periods. Payments to our affiliates and consumer electronics partners, may be in the form of a fixed-fee or may be a revenue sharing payment. Year ended December 31, Change 2010 2009 2010 vs. 2009 (in...

  • Page 31
    ... of 2009. The accrual related to those subscribers who did not utilize the free month prior to expiration was released in 2009. We expect legal costs to continue at a high level for the foreseeable future as we defend these claims. Year ended December 31, Change 2009 2008 2009 vs. 2008 (in thousands...

  • Page 32
    Interest and Other Income Interest and other income consist primarily of interest and dividend income generated from invested cash and short-term investments. Change Year ended December 31, 2010 2009 2010 vs. 2009 (in thousands, except percentages) Interest and other income ...As a percentage of ...

  • Page 33
    ...in 2017. Our primary uses of cash include payroll, advertising and payments to consumer electronics partners, stock repurchases, acquisition and licensing of content, content delivery, fulfillment expenses, taxes and capital expenditures related to information technology and automation equipment. We...

  • Page 34
    ... in the number of DVDs mailed to paying subscribers and higher costs associated with our use of third-party delivery networks to deliver streaming content, increased promotional advertising activities and expenses related to our affiliates and consumer electronic partners totaling $32.9 million...

  • Page 35
    ... of 2010, we extended the facilities leases for the Los Gatos buildings. See note 5 to the consolidated financial statements for further discussion of our lease financing obligations. (2) Content obligations include agreements to acquire and license content that represent long-term liabilities...

  • Page 36
    ... and DVD and streaming revenue sharing agreements with studios, distributors and other suppliers. We obtain content distribution rights in order to stream TV shows and movies to subscribers' TVs, computers and mobile devices. Streaming content is generally licensed for a fixed-fee for the term of...

  • Page 37
    ... obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of our subscription revenues or to pay a fee, based on utilization, for a defined period of time, or the title term, which typically ranges from six to twelve months for each title...

  • Page 38
    ...requisite service period, which is the vesting period. We calculate the fair value of new stock-based compensation awards under our stock option plans using a lattice-binomial model. We use a Black-Scholes model to determine the fair value of employee stock purchase plan shares. These models require...

  • Page 39
    ... securities and asset and mortgage-backed securities. At December 31, 2010, we had securities classified as short-term investments of $155.9 million. Changes in interest rates could adversely affect the market value of these investments. The table below separates these investments, based on stated...

  • Page 40
    ... recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate...

  • Page 41
    ...Over Financial Reporting There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information...

  • Page 42
    ... contained under the section "Compensation of Executive Officers and Other Matters" in our Proxy Statement for the Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information required by this item is incorporated...

  • Page 43
    ... Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, National Association, relating to the 8.50% Senior Notes due 2017. Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors 2002 Employee Stock Purchase Plan...

  • Page 44
    ...Oxley Act of 2002 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following financial information from Netflix, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on February 18...

  • Page 45
    ... TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2010 and 2009 ...Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008 ...Consolidated Statements of Stockholders' Equity and...

  • Page 46
    ...and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010. We also have audited Netflix, Inc's internal control over financial reporting as of December 31, 2010, based on...

  • Page 47
    ..., except share and per share data) As of December 31, 2010 2009 Assets Current assets: Cash and cash equivalents ...Short-term investments ...Current content library, net ...Prepaid content ...Other current assets ...Total current assets ...Content library, net ...Property and equipment, net...

  • Page 48
    ... CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year ended December 31, 2009 2008 2010 Revenues ...Cost of revenues: Subscription ...Fulfillment expenses ...Total cost of revenues ...Gross profit ...Operating expenses: Technology and development ...Marketing ...General...

  • Page 49
    ...on available-for-sale securities, net of taxes ...- Comprehensive income, net of taxes ...- Issuance of common stock upon exercise of options ...1,902,073 Issuance of common stock under employee stock purchase plan ...46,112 Repurchases of common stock ...(2,606,309) Stock-based compensation expense...

  • Page 50
    ... compensation expense ...Excess tax benefits from stock-based compensation ...Loss on disposal of property and equipment ...Gain on sale of short-term investments ...Gain on disposal of DVDs ...Gain on sale of business ...Deferred taxes ...Changes in operating assets and liabilities: Prepaid content...

  • Page 51
    ... assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the estimate of useful lives of its content library; the valuation of stock-based...

  • Page 52
    ... financial statements. The Company acquires DVD content for the purpose of renting such content to its subscribers and earning subscription rental revenues, and, as such, the Company considers its direct purchase DVD library to be a productive asset. Accordingly, the Company classifies its DVD...

  • Page 53
    ... obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of its subscription revenues or to pay a fee, based on utilization, for a defined period of time, or the title term, which typically ranges from six to twelve months for each title...

  • Page 54
    ... activities such as television and online advertising, as well as allocated costs of revenues relating to free trial periods. Advertising costs are expensed as incurred except for advertising production costs, which are expensed the first time the advertising is run. Advertising expense totaled...

  • Page 55
    ...average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The number of options excluded are immaterial for all periods presented. Stock-Based Compensation The Company grants stock options to its employees on a monthly basis...

  • Page 56
    ...time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. Short-term investments are therefore classified as available-for-sale securities and are reported at fair value as follows: December 31, 2010 Gross Gross...

  • Page 57
    ...2010 Quoted Prices in Significant Active Markets Other Significant for Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) (in thousands) Current Assets: Money market funds (1) ...Fixed income available-for-sale securities (2) ...Total current financial assets...

  • Page 58
    ...: As of December 31, 2010 2009 (in thousands) Computer equipment ...3 years Operations and other equipment ...5 years Software, including internal-use software ...3 years Furniture and fixtures ...3 years Building ...30 years Leasehold improvements ...Over life of lease Capital work-in-progress...

  • Page 59
    ..., related to workers' compensation insurance deposits. Accrued Expenses Accrued expenses consisted of the following: As of December 31, 2010 2009 (in thousands) Accrued state sales and use tax ...Accrued payroll and employee benefits ...Accrued interest on debt ...Accrued content acquisition costs...

  • Page 60
    ...option to extend or renew most of its leases which may increase the future minimum lease commitments. Because the terms of the Company's original facilities lease agreements required the Company's involvement in the construction funding of the buildings at its Los Gatos, California headquarters site...

  • Page 61
    ... ...Thereafter ...Total minimum payments ... $17,877 16,158 13,208 10,169 8,022 11,177 $76,611 Rent expense associated with the operating leases was $14.9 million, $14.5 million and $13.7 million for the years ended December 31, 2010, 2009 and 2008, respectively. Streaming Content The Company had...

  • Page 62
    ...are current or former Netflix customers, generally allege that Netflix and Wal-Mart 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. On March 19, 2010, plaintiffs filed a motion to certify...

  • Page 63
    ... Equity Stock Repurchase Program The following table presents a summary of our stock repurchases: 2010 Year ended December 31, 2009 (in thousands, except per share data) 2008 Total number of shares repurchased ...Dollar amount of shares repurchased ...Average price paid per share ...Range of price...

  • Page 64
    ... Company adopted the 2002 Employee Stock Purchase Plan ("ESPP"), which reserved a total of 1,166,666 shares of common stock for issuance. The 2002 Employee Stock Purchase Plan also provided for annual increases in the number of shares available for issuance on the first day of each year, beginning...

  • Page 65
    ... for future grant under the 2002 Stock Plan. A summary of the activities related to the Company's options is as follows: Options Outstanding WeightedAverage Number of Exercise Shares Price WeightedAverage Remaining Contractual Term (in Years) Shares Available for Grant Aggregate Intrinsic Value...

  • Page 66
    ... ten year contractual term regardless of employment status. In conjunction with this change, the Company changed its method of calculating the fair value of new stock-based compensation awards granted under its stock option plans from a Black-Scholes model to a lattice-binomial model. The Company...

  • Page 67
    ... of tax, related to stock option plans and employee stock purchases which were allocated as follows: Year Ended December 31, 2010 2009 2008 (in thousands) Fulfillment expenses ...Technology and development ...Marketing ...General and administrative ...Stock-based compensation expense before income...

  • Page 68
    ... for income taxes is as follows: Year Ended December 31, 2010 2009 2008 (in thousands) Expected tax expense at U.S. federal statutory rate of 35% ...State income taxes, net of Federal income tax effect ...R&D tax credit ...Stock-based compensation ...Other ...Provision for income taxes ... $ 93...

  • Page 69
    ..., respectively. 10. Related Party Transaction In April 2007, Netflix entered into a license agreement with a company in which an employee had a significant ownership interest at that time. Pursuant to this agreement, Netflix recorded a charge of $2.5 million in technology and development expense. In...

  • Page 70
    11. Selected Quarterly Financial Data (Unaudited) December 31 September 30 June 30 (in thousands) March 31 2010 Total revenues ...Gross profit ...Net income ...Net income per share: Basic ...Diluted ...2009 Total revenues ...Gross profit ...Net income ...Net income per share: Basic ...Diluted ... $...

  • Page 71
    ... to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Netflix, Inc. Dated: February 18, 2011 By: /S/ REED HASTINGS Reed Hastings Chief Executive Officer...

  • Page 72
    ... Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, National Association, relating to the 8.50% Senior Notes due 2017. Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors 2002 Employee Stock Purchase Plan...

  • Page 73
    ... Herewith 32.1* Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 The following financial information from Netflix, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC on February...

  • Page 74
    ... fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information...

  • Page 75
    ... fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information...

  • Page 76
    ... the Annual Report on Form 10-K of Netflix, Inc. for the year ended December 31, 2010 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...