10-QPeriod: Q2 FY2008

NETFLIX INC Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 11, 2008For Securities:NFLX

Summary

Netflix, Inc. reported its second-quarter 2008 financial results, showcasing continued revenue growth driven by an expanding subscriber base. While overall revenue increased year-over-year, the company experienced a decline in average revenue per paying subscriber, largely due to strategic price reductions and a shift towards lower-cost subscription plans. Despite a slight dip in gross margin compared to the previous year, attributed to increased postage costs and pricing strategies, Netflix demonstrated solid operational execution. Marketing expenses were reduced year-over-year, contributing to a lower subscriber acquisition cost, which is a positive sign for efficient customer growth. The company also continues to invest in technology and development to enhance its streaming capabilities and user experience, anticipating further increases in these expenses.

Financial Highlights

28 data points
Beta

Revenue

$337.61M

31.8% Gross Margin

Net Income

$26.58M

7.9% Net Margin

EPS (Diluted)

$0.01

Cash & Equivalents

$144.29M

Free Cash Flow

$52.72M

Financial Statements
Beta
Revenue$337.61M
Cost of Revenue$230.09M
Gross Profit$107.53M
R&D Expenses$22.19M
Operating Expenses$73.33M
Operating Income$34.20M
Interest Expense$681K
Net Income$26.58M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)4.32B
Shares Outstanding (Diluted)4.47B

Key Highlights

  • 1Revenue increased by 11.2% to $337.6 million in Q2 2008 compared to $303.7 million in Q2 2007.
  • 2Net income grew by 4.3% to $26.6 million in Q2 2008, up from $25.5 million in Q2 2007.
  • 3Diluted EPS rose to $0.42 from $0.36 year-over-year.
  • 4Total subscribers reached 8.4 million by the end of Q2 2008, a 24.8% increase from Q2 2007.
  • 5Subscriber Acquisition Cost (SAC) decreased significantly by 34.4% to $28.89 in Q2 2008 compared to $44.01 in Q2 2007.
  • 6Gross margin declined to 31.8% in Q2 2008 from 35.2% in Q2 2007, impacted by price reductions and increased postage costs.
  • 7Marketing expenses decreased by 11.6% year-over-year, reflecting a strategic shift in spending.

Frequently Asked Questions

Netflix experienced strong subscriber growth, ending the second quarter of 2008 with 8.4 million total subscribers, representing a 24.8% increase compared to the same period in the previous year.

The decline in average revenue per paying subscriber is primarily attributed to strategic price reductions for popular subscription plans implemented in the second half of 2007 and the continued growth of lower-cost subscription plans. Management anticipates this trend may continue until the subscriber mix by price point stabilizes.

Netflix is actively expanding its streaming capabilities. Recent developments include agreements for Blu-ray players with integrated Netflix streaming (LG Electronics), streaming via Xbox 360, and the introduction of dedicated streaming devices like The Netflix Player by Roku. The company is also collaborating with other consumer electronics manufacturers to broaden access to its streaming library.

The decrease in gross margin from 35.2% in Q2 2007 to 31.8% in Q2 2008 is primarily due to two factors: a reduction in the prices of their most popular subscription plans and an increase in postage rates effective May 2007 and May 2008. This highlights the ongoing pressure on profitability from pricing strategies and operational costs.