10-QPeriod: Q3 FY2008

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 3, 2008For Securities:NFLX

Summary

Netflix reported solid revenue growth in the third quarter of 2008, with revenues increasing by 16.1% year-over-year to $341.3 million. This growth was primarily driven by a substantial increase in the average number of paying subscribers, up 23.4% year-over-year. Net income also saw a significant increase of 30.2% to $20.4 million, with diluted earnings per share rising to $0.33. The company continued to invest in its streaming content capabilities, announcing partnerships to enable streaming directly to televisions and expanding its streaming library. Despite the positive revenue and profit growth, the company noted that recent economic deterioration might be slowing its growth trajectory. This is partly reflected in a slight decrease in average monthly revenue per paying subscriber, attributed to the growth of lower-cost subscription plans. The company is actively managing its capital, evidenced by significant stock repurchases totaling $90 million in the quarter, reducing the share count and returning value to shareholders. Looking ahead, Netflix anticipates continued growth in technology and development expenses as they focus on enhancing subscriber experience and expanding service offerings, while marketing expenses are expected to decrease year-over-year.

Financial Highlights

28 data points
Beta

Revenue

$341.27M

34.2% Gross Margin

Net Income

$20.37M

6.0% Net Margin

EPS (Diluted)

$0.00

Cash & Equivalents

$111.52M

Free Cash Flow

$51.27M

Financial Statements
Beta
Revenue$341.27M
Cost of Revenue$224.50M
Gross Profit$116.77M
R&D Expenses$23.37M
Operating Expenses$82.70M
Operating Income$34.07M
Interest Expense$677K
Net Income$20.37M
EPS (Basic)$0.00
EPS (Diluted)$0.00
Shares Outstanding (Basic)4.23B
Shares Outstanding (Diluted)4.36B

Key Highlights

  • 1Revenue increased by 16.1% year-over-year to $341.3 million for Q3 2008.
  • 2Net income grew by 30.2% year-over-year to $20.4 million, with diluted EPS at $0.33.
  • 3Total subscribers reached 8.67 million, a 23.4% increase year-over-year.
  • 4Marketing expenses remained relatively flat year-over-year, and subscriber acquisition cost decreased by 15.0% compared to Q3 2007, indicating improved marketing efficiency.
  • 5The company repurchased $90 million of its common stock in Q3 2008 under an authorized $150 million program.
  • 6Investment in technology and development increased by 29.0% year-over-year, reflecting ongoing efforts to enhance the service and streaming capabilities.
  • 7The company noted potential headwinds from economic deterioration impacting subscriber growth and other key metrics.

Frequently Asked Questions

Netflix's revenue growth is primarily driven by the substantial increase in the average number of paying subscribers. In Q3 2008, total subscribers grew by 23.4% year-over-year.

Marketing expenses were relatively flat year-over-year in Q3 2008, and the subscriber acquisition cost decreased by 15.0% compared to Q3 2007, indicating improved efficiency in acquiring new customers. The company anticipates marketing expenses to decrease year-over-year as they manage costs in response to price reductions implemented in late 2007.

Netflix acknowledges that recent economic deterioration may be slowing its growth. They anticipate that a continued downturn or prolonged recession could negatively impact subscriber growth, churn, and subscriber acquisition costs.

Netflix is actively expanding its streaming content and has announced partnerships with various technology and consumer electronics companies to enable direct streaming to televisions. They are also increasing their streaming content offering through new content agreements.