10-QPeriod: Q3 FY2009

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2009

Filed October 26, 2009For Securities:NFLX

Summary

Netflix Inc. reported strong growth in its third quarter of 2009, with revenues increasing by 24.0% year-over-year to $423.1 million. This revenue growth was driven by a significant 26.8% increase in the average number of paying subscribers, reaching 11.1 million by the end of the quarter. Despite a slight decrease in average monthly revenue per paying subscriber due to the popularity of lower-priced plans, the company's profitability saw a substantial boost, with net income rising 48.0% to $30.1 million and diluted earnings per share increasing 57.6% to $0.52. The company's strategic focus on a combined DVD-by-mail and streaming service continues to resonate with customers, as evidenced by the robust subscriber growth. Investments in technology and development, particularly for streaming capabilities, are increasing, indicating a forward-looking approach to content delivery. While facing ongoing litigation, Netflix demonstrated solid operational execution and financial health, managing its expenses effectively while expanding its subscriber base.

Financial Highlights

46 data points
Beta

Revenue

$423.12M

34.9% Gross Margin

Net Income

$30.14M

7.1% Net Margin

EPS (Diluted)

$0.01

Total Assets

$492.13M

Cash & Equivalents

$55.72M

Free Cash Flow

$68.32M

Financial Statements
Beta
Revenue$423.12M
Cost of Revenue$275.27M
Gross Profit$147.85M
R&D Expenses$30.01M
Operating Expenses$98.51M
Operating Income$49.34M
Interest Expense$674K
Net Income$30.14M
EPS (Basic)$0.01
EPS (Diluted)$0.01
Shares Outstanding (Basic)3.93B
Shares Outstanding (Diluted)4.06B

Key Highlights

  • 1Revenue increased 24.0% year-over-year to $423.1 million, driven by subscriber growth.
  • 2Total subscribers grew 28.1% year-over-year to 11.1 million.
  • 3Net income surged 48.0% year-over-year to $30.1 million.
  • 4Diluted earnings per share rose 57.6% year-over-year to $0.52.
  • 5Subscriber acquisition cost decreased by 16.6% year-over-year, indicating improved marketing efficiency.
  • 6Gross margin improved to 34.9% from 34.2% in the prior year quarter.
  • 7Technology and development expenses increased 28.4% to support streaming growth and other service improvements.

Frequently Asked Questions

The primary driver of revenue growth was a significant increase in the average number of paying subscribers, which grew by 26.8% year-over-year. This indicates strong customer acquisition and retention.

The cost of subscription revenue increased by 24.9% year-over-year, largely due to increased content delivery expenses (driven by more DVDs mailed) and higher investments in streaming content. While content acquisition costs rose, the company managed to improve its gross margin by 0.7% year-over-year to 34.9%, partly due to better utilization of catalog titles and a one-time credit in the prior year. Investments in streaming content are expected to continue, potentially impacting future gross margins if they outpace subscriber growth.

Netflix has an active stock repurchase program. In Q3 2009, the company repurchased approximately $70 million worth of its common stock under a new $300 million authorization and approximately $60 million under its 2009 program, which then terminated. This demonstrates a commitment to enhancing shareholder value through buybacks.

Yes, Netflix is involved in several legal proceedings. These include patent infringement lawsuits from third parties like Alcatel-Lucent USA Inc. and Quito Enterprises, LLC, as well as a class-action lawsuit alleging anti-trust violations related to DVD sales and rentals. While the company is actively defending itself, an unfavorable outcome in any of these matters could materially affect its financial position or results of operations.