10-QPeriod: Q1 FY2006

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2006

Filed May 9, 2006For Securities:NFLX

Summary

Netflix, Inc. reported significant growth for the quarter ended March 31, 2006, with revenues increasing by 47% year-over-year to $224.1 million. This strong top-line performance was driven by a substantial increase in the subscriber base, which grew by 63% to reach 4.87 million total subscribers. The company also achieved profitability, reporting a net income of $4.4 million, a significant turnaround from a net loss of $8.8 million in the same period last year. Despite the impressive revenue and profit growth, investors should note a decline in average monthly revenue per paying subscriber by 9.8% to $17.06, attributed to the introduction and increased adoption of lower-cost subscription plans. While marketing expenses increased in absolute terms to support subscriber acquisition, the subscriber acquisition cost remained relatively stable. The company's improved gross margin, rising to 33.8% from 27.1% in the prior year, indicates increasing operational efficiency and favorable cost management. Netflix continues to invest in technology and development to enhance its service and explore new avenues like movie downloads, signaling a forward-looking approach to market expansion and competitive positioning.

Key Highlights

  • 1Revenue grew 47% to $224.1 million for the quarter ended March 31, 2006.
  • 2Total subscribers increased by 63% to 4.87 million.
  • 3The company achieved profitability with a net income of $4.4 million, compared to a net loss of $8.8 million in the prior year.
  • 4Gross margin improved significantly to 33.8% from 27.1% in the prior year.
  • 5Average monthly revenue per paying subscriber decreased by 9.8% to $17.06 due to lower-priced plans.
  • 6Marketing expenses increased by 44.9% to $52.9 million, while subscriber acquisition cost remained stable at $38.47.
  • 7The company's cash and cash equivalents increased to $227.8 million, demonstrating strong liquidity.

Frequently Asked Questions

Netflix's revenue grew by 47% to $224.1 million, primarily driven by a substantial increase in its subscriber base, which grew by 63% to 4.87 million total subscribers. The company also benefited from increased awareness of online DVD rentals and improvements to its service.

The average monthly revenue per paying subscriber declined by 9.8% to $17.06. This decrease is attributed to the introduction and increased consumer adoption of lower-cost subscription plans, which Netflix began offering in the second quarter of 2005.

Marketing expenses increased by 44.9% to $52.9 million, reflecting investment in attracting new subscribers through various channels like direct mail, radio, television, and online advertising. Despite this increase, the subscriber acquisition cost remained relatively stable at $38.47, suggesting efficient marketing spend relative to subscriber growth. Netflix anticipates marketing expenses will continue to increase in absolute dollars to support business growth.

Netflix achieved profitability with a net income of $4.4 million in the first quarter of 2006, a significant turnaround from a net loss of $8.8 million in the same period of 2005. This improvement was driven by strong revenue growth, improved gross margins to 33.8%, and operating expenses growing at a slower pace than revenues. The company also benefited from a lower effective tax rate due to the reduction of its valuation allowance against deferred tax assets.