10-QPeriod: Q1 FY2003

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2003

Filed May 14, 2003For Securities:NFLX

Summary

Netflix, Inc. reported its first quarter 2003 results, showcasing significant growth in its subscription revenue, which surged by 84% year-over-year to $55.3 million, largely driven by an 88% increase in average paying subscribers. This robust subscriber growth, reaching over 1 million by the end of the quarter, highlights the increasing consumer adoption of its online DVD rental service. Despite revenue growth, the company's net loss widened slightly to $4.5 million from $4.5 million in the prior year, with a net loss per share improving to $(0.20) from $(2.20) due to a significantly larger share count post-IPO. Financially, Netflix maintained a strong liquidity position with $66.0 million in cash and cash equivalents and $44.3 million in short-term investments. The company's operating activities generated $12.8 million in cash, a substantial increase from the prior year, indicating improved cash generation from core operations. However, operating expenses, particularly marketing, increased significantly, impacting profitability. Management is focused on managing subscriber acquisition costs and optimizing fulfillment operations to improve future margins.

Key Highlights

  • 1Subscription revenue grew 84% year-over-year to $55.3 million, driven by a significant increase in paying subscribers.
  • 2Total subscribers surpassed 1 million by the end of the quarter, a 74% increase year-over-year.
  • 3Net loss remained stable at $4.5 million, but improved net loss per share to $(0.20) due to a higher share count.
  • 4Cash and cash equivalents increased to $66.0 million, and short-term investments stood at $44.3 million, reflecting a strong liquidity position.
  • 5Net cash provided by operating activities more than doubled to $12.8 million, indicating improved operational cash generation.
  • 6Marketing expenses increased by 66% due to higher subscriber acquisition costs and trial offers.
  • 7Gross margin declined to 46.1% from 50.4% due to increased disc usage per subscriber and higher acquisition costs.

Frequently Asked Questions

Netflix's primary revenue driver is its subscription service, which generated $55.3 million in revenue for the first quarter of 2003, an 84% increase compared to the same period in the prior year. This growth was primarily fueled by an 88% increase in average paying subscribers.

Netflix maintains a strong liquidity position with $66.0 million in cash and cash equivalents and $44.3 million in short-term investments as of March 31, 2003. The company also generated $12.8 million in cash from operating activities during the quarter, a significant increase from the prior year, indicating sound financial health.

While Netflix's total revenue has grown substantially, the company reported a net loss of $4.5 million, similar to the prior year's loss. The net loss per share improved to $(0.20) due to a larger number of outstanding shares post-IPO. Key factors influencing profitability include rising marketing expenses (up 66%) due to increased subscriber acquisition costs, and a decrease in gross margin to 46.1% from 50.4%, attributed to higher disc usage and associated costs.

Netflix is focused on expanding its subscriber base, evidenced by a 74% year-over-year increase in total subscribers to over 1 million. To manage costs, the company is working on optimizing its fulfillment operations and managing subscriber acquisition costs, although marketing expenses have risen. They are also strategically opening new shipping centers to improve delivery times and library utilization.