10-QPeriod: Q2 FY2004

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2004

Filed August 2, 2004For Securities:NFLX

Summary

Netflix, Inc.'s second-quarter 2004 filing indicates robust revenue growth, primarily driven by an 89.8% increase in subscription revenue year-over-year, reaching $119.7 million. This growth was fueled by a significant rise in paying subscribers, up 83.8% to 2,024,000 by quarter-end. Despite this top-line performance, the company reported a net loss of $2.9 million for the six-month period ending June 30, 2004, a deterioration from a net income of $938,000 in the prior year's comparable period. This shift to a net loss is largely attributed to increased operating expenses, particularly in marketing, which rose by over 100% year-over-year, and a decrease in gross margin from 45.1% to 42.7% as cost of revenues grew faster than revenues. The company also highlighted strategic initiatives, including planned international expansion into the United Kingdom with anticipated operating losses and investment in downloading solutions. While cash and cash equivalents remain strong at $153.4 million, signaling ample liquidity, investors should closely monitor the impact of increased marketing spend, the slight uptick in subscriber churn due to a recent price increase, and the profitability of new international ventures. The overall financial picture suggests strong subscriber acquisition but also rising costs that are impacting profitability.

Key Highlights

  • 1Total revenues grew by 90.4% year-over-year to $120.3 million for the three months ended June 30, 2004.
  • 2Subscription revenues increased by 89.8% year-over-year to $119.7 million for the three months ended June 30, 2004.
  • 3The number of paying subscribers grew by 83.8% to 2,024,000 as of June 30, 2004, compared to 1,101,000 in the prior year.
  • 4The company reported a net loss of $2.9 million for the six months ended June 30, 2004, compared to a net income of $938,000 in the same period of 2003.
  • 5Marketing expenses increased significantly, rising by 105.7% year-over-year for the three months ended June 30, 2004, with Subscriber Acquisition Cost increasing to $35.12.
  • 6Gross margin decreased to 42.0% for the three months ended June 30, 2004, down from 44.2% in the prior year, primarily due to increased costs related to DVD amortization and postage.
  • 7Cash and cash equivalents significantly increased to $153.4 million as of June 30, 2004, and the company liquidated all short-term investments.

Frequently Asked Questions

Netflix experienced strong subscriber growth. Total subscribers grew by 82.5% to 2,093,000 by June 30, 2004, with paid subscribers increasing by 83.8% to 2,024,000.

For the three months ended June 30, 2004, Netflix reported a net income of $2.9 million. However, for the six-month period ended June 30, 2004, the company reported a net loss of $2.9 million, a notable shift from a net income of $938,000 in the comparable period of the prior year.

The shift to a net loss for the six-month period is primarily attributed to a significant increase in operating expenses, particularly marketing costs which more than doubled year-over-year. Additionally, the gross margin declined due to cost of revenues growing at a faster rate than revenues, impacted by increased DVD amortization and postage expenses.

Netflix is planning to launch its online DVD rental subscription service in the United Kingdom in the fourth quarter of 2004, anticipating operating losses in the initial phase. The company is also investing in developing solutions for downloading movies, aiming to offer subscribers the choice between DVDs and digital downloads in the future.