10-KPeriod: FY2006

NETFLIX INC Annual Report, Year Ended Dec 31, 2006

Filed February 28, 2007For Securities:NFLX

Summary

Netflix Inc.'s 2006 10-K report highlights a rapidly growing online DVD rental subscription service with over 6.3 million subscribers. The company emphasizes its strategy of expanding its DVD business while preparing for the transition to internet-based movie delivery, evidenced by the recent launch of an "instant-viewing" feature. Key strengths include a comprehensive title library, a proprietary recommendation service, a scalable business model, and convenient home delivery. The company is focused on subscriber growth and leveraging technology to minimize costs and enhance customer experience. Financially, Netflix demonstrated strong revenue growth of 46% in 2006, reaching $996.6 million, primarily driven by subscriber expansion. Despite a decline in average monthly revenue per subscriber due to the popularity of lower-cost plans, the company achieved a significant improvement in gross margin to 37.1% in 2006. However, the company anticipates increased expenses related to its new instant-viewing feature, potentially impacting gross margins in 2007. The company also reported a healthy cash position and positive cash flow from operations.

Key Highlights

  • 1Exceeded 6.3 million subscribers by year-end 2006, demonstrating strong customer adoption of the online DVD rental model.
  • 2Achieved 46% revenue growth in 2006, reaching $996.6 million, driven by a 60% increase in average paying subscribers.
  • 3Successfully expanded gross margin to 37.1% in 2006, up from 31.7% in 2005, due to operational efficiencies and shifts in content acquisition costs.
  • 4Launched an "instant-viewing" feature in January 2007, signaling a strategic pivot towards internet-based movie delivery and future growth.
  • 5Managed subscriber acquisition costs (SAC) at $42.96 in 2006, a modest increase from prior years, indicating a relatively stable cost of acquiring new customers.
  • 6Maintained a strong balance sheet with $400.4 million in cash and cash equivalents at year-end 2006, providing financial flexibility.
  • 7Experienced a decline in average monthly revenue per paying subscriber to $16.22 in 2006, reflecting the strategic shift towards lower-priced subscription plans.

Frequently Asked Questions

Netflix's core business is operating the largest online movie rental subscription service, providing DVD rentals via mail to over 6.3 million subscribers. Its strategy is to grow the DVD subscription business while simultaneously preparing to expand into Internet-based movie delivery. This dual approach aims to leverage its existing subscriber base for the transition to digital distribution.

In 2006, Netflix reported significant revenue growth of 46% to $996.6 million, driven by a 60% increase in average paying subscribers. The company also saw a substantial improvement in its gross margin, rising to 37.1% from 31.7% in the previous year. Its cash position remained strong, ending the year with $400.4 million in cash and cash equivalents.

Netflix faces intense competition from traditional video rental outlets like Blockbuster, other online services, and emerging digital delivery technologies such as Video on Demand (VOD) and internet downloading. Key risks include subscriber churn, the ability to attract and retain subscribers against competitors, potential shifts in consumer preferences away from DVDs, and the need to continually innovate and adapt to new distribution methods. They also highlight risks related to postage costs and reliance on the U.S. Postal Service.

Netflix is actively preparing for the transition to digital delivery. They launched an "instant-viewing" feature in January 2007, allowing subscribers to watch movies and TV series on their PCs. The company plans to roll this out to all subscribers within six months and intends to expand its distribution capabilities to multiple platforms over time, positioning itself for the future of online content delivery.