10-QPeriod: Q3 FY2011

NETFLIX INC Quarterly Report for Q3 Ended Sep 30, 2011

Filed October 27, 2011For Securities:NFLX

Summary

Netflix Inc. reported its third-quarter 2011 financial results, revealing a significant revenue increase of 48.6% year-over-year, reaching $821.8 million. This growth was primarily driven by a 51.5% increase in average domestic paying subscribers. However, the company also experienced a notable rise in churn rate to 6.3% following a controversial decision to separate DVD and streaming services and a proposed rebranding of the DVD service to 'Qwikster,' which was later retracted. This led to negative net subscriber additions in the domestic market for the quarter. Despite the subscriber challenges, the company's international segment showed promising growth, contributing $22.7 million in revenue. Netflix is investing heavily in content for its international expansion, anticipating further contribution losses in this segment for 2011 and 2012. The company projects consolidated net losses in 2012 due to these investments and the ongoing impact of subscriber cancellations. While liquidity remains adequate for the foreseeable future, the company indicated potential future financing needs and the suspension of stock repurchases.

Financial Highlights

46 data points
Beta

Revenue

$821.84M

34.7% Gross Margin

Net Income

$62.46M

7.6% Net Margin

EPS (Diluted)

$0.02

Total Assets

$1.96B

Cash & Equivalents

$159.20M

Free Cash Flow

$35.45M

Financial Statements
Beta
Revenue$821.84M
Cost of Revenue$536.62M
Gross Profit$285.22M
R&D Expenses$69.48M
Operating Expenses$188.38M
Operating Income$96.84M
Interest Expense$4.92M
Net Income$62.46M
EPS (Basic)$0.02
EPS (Diluted)$0.02
Shares Outstanding (Basic)3.68B
Shares Outstanding (Diluted)3.77B

Key Highlights

  • 1Revenue grew significantly by 48.6% year-over-year to $821.8 million, driven by subscriber growth.
  • 2Domestic churn rate increased sharply to 6.3% in Q3 2011, impacting net subscriber additions negatively.
  • 3International revenue reached $22.7 million, reflecting ongoing global expansion efforts.
  • 4Technology and development expenses increased by 65.0% due to higher personnel costs for service improvements and international expansion.
  • 5Marketing expenses increased by 9.7%, with higher spending on advertising and affiliate programs, despite a decrease in subscriber acquisition cost.
  • 6The company anticipates consolidated net losses in 2012 due to international investments and subscriber churn.
  • 7Free cash flow for the quarter was $13.8 million, a significant decrease from the previous quarter but an increase from the prior year.

Frequently Asked Questions

The primary reason for the significant increase in subscriber churn to 6.3% was the negative consumer reaction to the company's decision to separate its unlimited DVD-by-mail and unlimited streaming services into two distinct plans, along with a proposed rebranding of the DVD service to 'Qwikster,' which was later retracted.

Netflix has expanded its international streaming service to Latin America and the Caribbean in Q3 2011, with plans for the UK and Ireland in Q1 2012. While this segment is growing and contributed $22.7 million in revenue, the company anticipates significant contribution losses in the International segment for 2011 and 2012 due to substantial investments in content and subscriber acquisition.

Netflix expects consolidated net losses in 2012 due to continued international investments and the impact of subscriber cancellations and churn. Consequently, the company also anticipates negative free cash flows in future periods and has suspended its stock repurchase program for the foreseeable future.

Netflix is making substantial investments in its streaming content library. Cost of subscription revenues, primarily driven by content acquisition and licensing expenses, increased significantly by 61.4% year-over-year. The company expects this spending to continue increasing substantially.