10-QPeriod: Q1 FY2008

NETFLIX INC Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 6, 2008For Securities:NFLX

Summary

Netflix Inc. reported first-quarter 2008 results demonstrating continued revenue growth driven by an expanding subscriber base, reaching over 8.2 million total subscribers. While revenue increased year-over-year, the company experienced a decline in gross margin due to pricing adjustments and increased content acquisition costs. Marketing expenses were reduced significantly compared to the prior year, leading to a lower subscriber acquisition cost, which is a positive trend for operational efficiency. The company also highlighted its strategic focus on growing its DVD subscription business while simultaneously investing in streaming content capabilities and partnerships. Financial performance showed a healthy increase in net income and earnings per share compared to the first quarter of 2007. However, cash and cash equivalents saw a decrease due to significant stock repurchases undertaken during the quarter, signaling a return of capital to shareholders.

Key Highlights

  • 1Revenue increased by 6.8% to $326.2 million for the three months ended March 31, 2008, compared to $305.3 million in the same period of 2007.
  • 2Net income grew by 35.6% to $13.4 million ($0.21 per diluted share) for the first quarter of 2008, up from $9.9 million ($0.14 per diluted share) in the prior year.
  • 3Total subscribers grew to 8.24 million at the end of the first quarter of 2008, a significant increase from 6.80 million in the prior year.
  • 4Marketing expenses decreased by 23.8% year-over-year, leading to a substantial reduction in subscriber acquisition cost to $29.50 from $47.46.
  • 5Gross margin declined to 31.7% from 36.1% year-over-year, impacted by price reductions and increased content costs.
  • 6The company repurchased approximately $99.9 million of its common stock during the quarter, demonstrating a commitment to returning capital to shareholders.

Frequently Asked Questions

Revenue growth was primarily driven by a substantial increase in the average number of paying subscribers, which grew by 20.2% year-over-year, reaching over 8.2 million total subscribers. This growth was partially offset by a price reduction for popular subscription plans and a decline in average monthly revenue per paying subscriber due to the increased adoption of lower-cost plans.

The gross margin decreased from 36.1% to 31.7% primarily due to a reduction in the prices of Netflix's most popular subscription plans implemented in the second half of 2007. Additionally, increased costs related to content library acquisitions and higher postage rates also contributed to the margin compression.

Netflix's core strategy is to grow its large DVD subscription business while expanding its streaming content offerings. The company is investing in streaming capabilities and forming partnerships with consumer electronics manufacturers to enable streaming to televisions, aiming to transition subscribers and the business to streaming as it becomes a preferred medium.

Netflix repurchased approximately $99.9 million of its common stock during the first quarter of 2008. This significant expenditure resulted in a decrease in cash and cash equivalents and a net cash outflow from financing activities, reflecting a strategic decision to return capital to shareholders.