UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2010~~March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-49802

Netflix, Inc.

(Exact name of Registrant as specified in its charter)

Delaware

77-0467272

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

100 Winchester Circle, Los Gatos, California 95032

(Address and zip code of principal executive offices)

(408) 540-3700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of ~~September 30, 2010,~~March 31, 2011, there were ~~52,257,495~~52,519,159 shares of the registrant’s common stock, par value $0.001, outstanding.

Table of Contents


			Page
Part I. Financial Information		3

Item 1.	Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3129
Item 4.	Controls and Procedures	3129

Part II. Other Information		3230

Item 1.	Legal Proceedings	3230
Item 1A.	Risk Factors	3230
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3230
Item 6.	Exhibits	3431

Signatures		3632

Exhibit Index		3733

PART I. FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

Index to Consolidated Financial Statements


	Page
Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~		4
Consolidated Balance Sheets as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010		5
Consolidated Statements of Cash Flows for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~		6
Notes to Consolidated Financial Statements		7

NETFLIX, INC.

~~Netflix, Inc.~~

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009			March 31, 2011			March 31, 2010
Revenues	$	553,219		$	423,120		$	1,566,703		$	1,225,727		$	718,553		$	493,665

Cost of revenues:
Subscription		292,406			233,091			817,353			677,863			376,992			259,560
Fulfillment expenses *		52,063			42,183			149,212			125,922
Fulfillment expenses														61,159			47,602

Total cost of revenues		344,469			275,274			966,565			803,785			438,151			307,162

Gross profit		208,750			147,846			600,138			421,942			280,402			186,503

Operating expenses:
Technology and development *		42,108			30,014			117,370			81,333
Marketing *		81,238			58,556			230,990			167,029
General and administrative *		17,135			11,543			51,447			37,809
Gain on disposal of DVDs		(1,232	)		(1,604	)		(4,857	)		(2,819	)
Technology and development														50,905			37,399
Marketing														104,259			75,219
General and administrative														22,998			15,540

Total operating expenses		139,249			98,509			394,950			283,352			178,162			128,158

Operating income		69,501			49,337			205,188			138,590			102,240			58,345
Other income (expense):
Interest expense		(4,945	)		(674	)		(14,797	)		(2,018	)		(4,865	)		(4,959	)
Interest and other income		853			1,808			2,746			4,284			865			972

Income before income taxes		65,409			50,471			193,137			140,856			98,240			54,358
Provision for income taxes		27,442			20,330			79,379			55,909			38,007			22,086

Net income	$	37,967		$	30,141		$	113,758		$	84,947		$	60,233		$	32,272

Net income per share:
Basic	$	0.73		$	0.54		$	2.17		$	1.48		$	1.14		$	0.61

Diluted	$	0.70		$	0.52		$	2.09		$	1.43		$	1.11		$	0.59

Weighted average common shares outstanding:
Basic		52,142			56,146			52,510			57,576			52,759			52,911

Diluted		53,931			57,938			54,341			59,427			54,246			54,775


*Stock-based compensation included in expense line items:
Fulfillment expenses	$	323		$	99		$	806		$	321
Technology and development		2,694			1,169			6,939			3,430
Marketing		777			452			2,176			1,353
General and administrative		3,502			1,512			9,805			4,538

See accompanying notes to the consolidated financial statements.

~~Netflix, Inc.~~NETFLIX, INC.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)


	As of				As of
	September 30, 2010		December 31, 2009		March 31, 2011		December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	113,108	$	134,224	$	150,419	$	194,499
Short-term investments		143,705		186,018		192,302		155,888
Current content library, net		138,389		37,329		265,933		181,006
Prepaid content		59,322		26,741		74,597		62,217
Other current assets		37,723		26,701		38,351		47,357

Total current assets		492,247		411,013		721,602		640,967
Content library, net		120,047		108,810		197,554		180,973
Property and equipment, net		125,057		131,653		134,800		128,570
Deferred tax assets		19,219		15,958		22,452		17,467
Other non-current assets		13,713		12,300		13,780		14,090

Total assets	$	770,283	$	679,734	$	1,090,188	$	982,067


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	170,120	$	92,542	$	301,009	$	222,824
Accrued expenses		36,974		33,387		44,123		36,489
Current portion of lease financing obligations		2,027		1,410		2,141		2,083
Deferred revenue		102,986		100,097		143,045		127,183

Total current liabilities		312,107		227,436		490,318		388,579
Long-term debt		200,000		200,000		200,000		200,000
Lease financing obligations, excluding current portion		34,659		36,572		33,564		34,123
Other non-current liabilities		31,542		16,583		90,584		69,201

Total liabilities		578,308		480,591		814,466		691,903
Commitments and contingencies
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at September 30, 2010 and December 31, 2009; 52,257,495 and 53,440,073 issued and outstanding at September 30, 2010 and December 31, 2009, respectively		52		53
Common stock, $0.001 par value; 160,000,000 shares authorized at March 31, 2011 and December 31, 2010; 52,519,159 and 52,781,949 issued and outstanding at March 31, 2011 and December 31, 2010, respectively						52		53
Additional paid-in capital						—		51,622
Accumulated other comprehensive income, net		1,279		273		590		750
Retained earnings		190,644		198,817		275,080		237,739

Total stockholders’ equity		191,975		199,143		275,722		290,164

Total liabilities and stockholders’ equity	$	770,283	$	679,734	$	1,090,188	$	982,067

See accompanying notes to the consolidated financial statements.

NETFLIX, INC.

~~Netflix, Inc.~~

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009			March 31, 2011			March 31, 2010
Cash flows from operating activities:
Net income	$	37,967		$	30,141		$	113,758		$	84,947		$	60,233		$	32,272
Adjustments to reconcile net income to net cash provided by operating activities:
Acquisition of streaming content library		(115,149	)		(9,998	)		(231,781	)		(41,432	)		(192,307	)		(50,475	)
Amortization of content library		77,146			56,690			204,581			159,229			112,927			62,292
Depreciation and amortization of property, equipment and intangibles		8,678			9,618			28,846			27,806
Amortization of discounts and premiums on investments		200			126			670			439
Amortization of debt issuance costs		140			—			375			—
Depreciation and amortization of property, equipment, and intangibles														9,826			10,859
Stock-based compensation expense		7,296			3,232			19,726			9,642			12,264			5,502
Excess tax benefits from stock-based compensation		(16,093	)		(1,600	)		(34,699	)		(9,099	)		(15,654	)		(7,424	)
Loss on disposal of property and equipment		254			—			254			254
Gain on sale of short-term investments		(206	)		(984	)		(685	)		(1,455	)
Gain on disposal of DVDs		(2,142	)		(2,491	)		(8,428	)		(5,030	)
Other non-cash income														(925	)		(3,160	)
Deferred taxes		3,194			(71	)		(2,961	)		4,710			(4,982	)		(2,761	)
Changes in operating assets and liabilities:
Prepaid content		(25,485	)		107			(32,581	)		2,592			(12,380	)		(4,963	)
Other current assets		(3,374	)		7,518			(12,037	)		(4,203	)		9,084			548
Accounts payable		41,692			(13,173	)		78,738			(11,150	)		77,963			17,340
Accrued expenses		18,003			2,175			39,666			6,272			22,670			13,746
Deferred revenue		1,567			(1,372	)		2,889			(4,004	)		15,862			12
Other assets and liabilities		8,539			(1,607	)		13,353			(272	)
Other non-current assets and liabilities														21,742			3,417

Net cash provided by operating activities		42,227			78,311			179,684			219,246			116,323			77,205


Cash flows from investing activities:
Acquisition of DVD content library		(29,900	)		(46,273	)		(90,993	)		(135,996	)		(22,119	)		(36,902	)
Purchases of short-term investments		(15,379	)		(21,006	)		(73,169	)		(102,159	)		(52,266	)		(35,995	)
Proceeds from sale of short-term investments		42,238			85,904			105,063			130,669			14,961			30,770
Proceeds from maturities of short-term investments		1,995			3,480			10,318			30,985			650			4,013
Purchases of property and equipment		(7,342	)		(9,994	)		(19,406	)		(23,499	)		(16,320	)		(6,393	)
Proceeds from sale of DVDs		3,109			3,345			10,908			7,230
Other assets		(327	)		134			(619	)		(57	)		1,419			3,682

Net cash (used in) provided by investing activities		(5,606	)		15,590			(57,898	)		(92,827	)
Net cash used in investing activities														(73,675	)		(40,825	)


Cash flows from financing activities:
Principal payments of lease financing obligations		(470	)		(294	)		(1,296	)		(858	)		(501	)		(361	)
Proceeds from issuance of common stock		10,927			2,725			33,954			26,092			6,762			9,918
Excess tax benefits from stock-based compensation		16,093			1,600			34,699			9,099			15,654			7,424
Repurchases of common stock		(57,390	)		(129,686	)		(210,259	)		(244,916	)		(108,643	)		(107,724	)

Net cash used in financing activities		(30,840	)		(125,655	)		(142,902	)		(210,583	)		(86,728	)		(90,743	)

Net increase (decrease) in cash and cash equivalents		5,781			(31,754	)		(21,116	)		(84,164	)
Net decrease in cash and cash equivalents														(44,080	)		(54,363	)
Cash and cash equivalents, beginning of period		107,327			87,471			134,224			139,881			194,499			134,224

Cash and cash equivalents, end of period	$	113,108		$	55,717		$	113,108		$	55,717		$	150,419		$	79,861

See accompanying notes to the consolidated financial statements.

NETFLIX, INC.

~~Netflix, Inc.~~

Notes to Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying ~~condensed~~ consolidated interim financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2009.~~2010. The preparation of ~~condensed~~ consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the ~~condensed~~ consolidated financial statements and accompanying notes. ~~Examples~~Significant items subject to such estimates and assumptions include the ~~estimates of useful lives and residual value~~amortization methodology of the Company’s content library, the valuation of stock-based compensation and the recognition and measurement of income tax assets and ~~liabilities~~liabilities. The Company bases its estimates on historical experience and ~~royalties~~on various other assumptions that ~~may~~the Company believes to be ~~due to performing rights organizations.~~reasonable under the circumstances. The actual results experienced by the Company may differ from management’s estimates.

The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2009~~2010 filed with the Securities and Exchange Commission (the “SEC”) on February ~~22, 2010.~~18, 2011. Interim results are not necessarily indicative of the results for a full year.

The Company is organized into two operating segments: Domestic (which includes the United States) and International. See Note 10 for further information about the Company’s operating segments.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not impact any prior amounts of reported total assets or total liabilities, and did not impact stockholders’ equity, results of operations or cash flows.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2009.~~

~~Recent Accounting Pronouncements~~

There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K, that are of significance, or potential significance to the Company.2010.

2. Net Income Per Share

Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of incremental shares issuable upon the assumed exercise of stock options and shares currently purchasable pursuant to the Company’s employee stock purchase plan using the treasury stock method. The computation of net income per share is as follows:


	Three months ended				Nine months ended				Three months ended
	September 30, 2010		September 30, 2009		September 30, 2010		September 30, 2009		March 31, 2011		March 31, 2010
	(in thousands, except per share data)								(in thousands, except per share data)
Basic earnings per share:
Net income	$	37,967	$	30,141	$	113,758	$	84,947	$	60,233	$	32,272
Shares used in computation:
Weighted-average common shares outstanding		52,142		56,146		52,510		57,576		52,759		52,911

Basic earnings per share	$	0.73	$	0.54	$	2.17	$	1.48	$	1.14	$	0.61


Diluted earnings per share:
Net income	$	37,967	$	30,141	$	113,758	$	84,947	$	60,233	$	32,272
Shares used in computation:
Weighted-average common shares outstanding		52,142		56,146		52,510		57,576		52,759		52,911
Employee stock options and employee stock purchase plan shares		1,789		1,792		1,831		1,851		1,487		1,864

Weighted-average number of shares		53,931		57,938		54,341		59,427		54,246		54,775

Diluted earnings per share	$	0.70	$	0.52	$	2.09	$	1.43	$	1.11	$	0.59

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

Employee stock options with exercise prices greater than the average market price of the common stock during the period were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The ~~potential common shares~~number of options excluded ~~from the diluted calculation were not material as of the three or nine months ended September 30, 2010 or 2009.~~is immaterial for all periods presented.

3. Short-Term Investments and Fair Value Measurement

The Company’s investment policy is consistent with the definition of available-for-sale securities. The Company does not buy and hold securities principally for the purpose of selling them in the near future. The Company’s policy is focused on the preservation of capital, liquidity and return. From time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. ~~Short-term investments are therefore classified as available-for-sale securities and are reported at fair value as follows:~~

   September 30, 2010
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Estimated
Fair Value
   (in thousands)
Corporate debt securities
   $ 100,760       $ 1,408       $ (51 ) $ 102,117
Government and agency securities
   37,842       674       —      38,516
Asset and mortgage backed securities
   3,028       172       (128 ) 3,072

   $ 141,630       $ 2,254       $ (179 ) $ 143,705

   December 31, 2009
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Estimated
Fair Value
   (in thousands)
Corporate debt securities
   $ 82,362       $ 915       $ (106 ) $ 83,171
Government and agency securities
   96,998       72       (416 ) 96,654
Asset and mortgage backed securities
   6,262       143       (212 ) 6,193

   $ 185,622       $ 1,130       $ (734 ) $ 186,018

~~Gross unrealized losses are not material as of September 30, 2010 or December 31, 2009 either individually or in the aggregate. Because the Company does not intend to sell the investments~~The following table summarizes, by major security type, our assets that are in an unrealized loss position and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, the Company does not consider those investments with an unrealized loss to be other-than-temporarily impaired at September 30, 2010. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the three or nine months ended September 30, 2010 or 2009. Gross realized gains in the three months ended September 30, 2010 and 2009 were $0.2 million and $1.0 million, respectively. Gross realized gains in the nine months ended September 30, 2010 and 2009 were $0.7 million and $1.7 million, respectively. There were no material gross realized losses from the sale of available-for-sale securities in the three or nine months ended September 30, 2010 or 2009.

~~The estimated fair value of short-term investments by contractual maturity as of September 30, 2010 is as follows:~~

   (in thousands)
Due within one year
   $ 21,388
Due after one year and through 5 years
   119,315
Due after 5 years and through 10 years
   —
Due after 10 years
   3,002

Total short-term investments
   $ 143,705

~~The Company measures certain financial assets~~measured at fair value on a recurring basis ~~including cash equivalents~~ and ~~available-for-sale securities.~~ are categorized using the fair value hierarchy:


	March 31,2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	135,887	$	—	$	—		$	135,887
Level 1 securities (1):
Money market funds		4,996		—		—			4,996
Level 2 securities (2):
Corporate debt securities		113,384		825		(140	)		114,069
Government and agency securities		90,921		311		(117	)		91,115
Asset and mortgage-backed securities		1,158		58		—			1,216

	$	346,346	$	1,194	$	(257	)	$	347,283

Less: Long-term restricted cash (1)									(4,562	)

Total cash, cash equivalents and short-term investments								$	342,721


	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	194,146	$	—	$	—		$	194,146
Level 1 securities (1):
Money market funds		4,914		—		—			4,914
Level 2 securities (3):
Corporate debt securities		109,745		1,043		(101	)		110,687
Government and agency securities		42,062		331		(101	)		42,292
Asset and mortgage-backed securities		2,881		168		(140	)		2,909

	$	353,748	$	1,542	$	(342	)		354,948

Less: Long-term restricted cash (1)									(4,561	)

Total cash, cash equivalents and short-term investments								$	350,387

(1)

Includes $0.4 million that is included in cash and cash equivalents in the Company’s consolidated balance sheets and $4.6 million of long-term restricted cash that is included in other non-current assets in the Company’s consolidated balance sheets as these funds represent restricted cash related to workers compensation deposits.

(2) Includes $14.1 million that is included in cash and cash equivalents in the Company’s consolidated balance sheets and $192.3 million included in short-term investments in the Company’s consolidated balance sheets.
(3) Included in short-term investments in the Company’s consolidated balance sheets.

Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability.

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

   Fair Value Measurements at September 30, 2010
   Total    Quoted Prices in
Active Markets for
Identical Assets    Significant Other
Observable Inputs    Significant
Unobservable
Inputs
      (Level 1)    (Level 2)    (Level 3)
   (in thousands)
Current Assets:

Money market funds (1)
   $ 217       $ 217       $ —         $ —
Fixed income securities (2)
   155,904       —         155,904       —

Total current assets
   156,121       217       155,904       —

Non-current Assets:

Money market funds (3)
   3,729       3,729       —         —

Total assets
   $ 159,850       $ 3,946       $ 155,904       $ —

   Fair Value Measurements at December 31, 2009
   Total    Quoted Prices in
Active Markets for
Identical Assets    Significant Other
Observable Inputs    Significant
Unobservable
Inputs
      (Level 1)    (Level 2)    (Level 3)
   (in thousands)
Current Assets:

Money market funds (1)
   $ 690       $ 690       $ —         $ —
Fixed income securities (4)
   186,018       —         186,018       —

Total current assets
   186,708       690       186,018       —

Non-current Assets:

Money market funds (3)
   2,829       2,829       —         —

Total assets
   $ 189,537       $ 3,519       $ 186,018       $ —

~~(1)~~

~~Included in cash and cash equivalents in the Company’s consolidated balance sheets.~~

~~(2)~~

~~Includes $12.2 million included in cash and cash equivalents and $143.7 million included in short-term investments in the Company’s consolidated balance sheets as of September 30, 2010.~~

~~(3)~~

~~Included in other non-current assets in the Company’s consolidated balance sheets as these funds represent restricted cash related to workers compensation deposits.~~

~~(4)~~

~~Included in short-term investments in the Company’s consolidated balance sheets.~~

The hierarchy level assigned to each security in the Company’s available-for-sale portfolio and cash equivalents is based on its assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The fair value of available-for-sale securities included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. The fair value of available-for-sale securities and cash equivalents included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from an independent pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well established independent pricing vendors and broker-dealers. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources. See Note 4 for further information regarding the fair value of the Company’s 8.50% senior notes.

Because the Company does not intend to sell the investments that are in an unrealized loss position and it is not likely that the Company will be required to sell any investments before recovery of their amortized cost basis, the Company does not consider those investments with an unrealized loss to be other-than-temporarily impaired at March 31, 2011. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the three months ended March 31, 2011 and 2010. In addition, there were no material gross realized gains or losses in the three months ended March 31, 2011 and 2010.

The estimated fair value of short-term investments by contractual maturity as of March 31, 2011 is as follows:


	(in thousands)
Due within one year	$	35,219
Due after one year and through 5 years		155,866
Due after 5 years and through 10 years		—
Due after 10 years		1,217

Total short-term investments	$	192,302

4. Long-term Debt

As of ~~September 30, 2010,~~March 31, 2011, the Company had $200.0 million of long-term debt outstanding. The debt consists of $200.0 million aggregate principal amount of 8.50% senior notes due November 15, 2017 ~~(“the Notes”~~(the “Notes”). Interest on the Notes is payable semi-annually at a rate of 8.50% per annum on May 15 and November 15 of each year, commencing on May 15, 2010.

The ~~8.50%~~ Notes include, among other terms and conditions, limitations on the Company’s ability to create, incur, assume or be liable for indebtedness (other than specified types of permitted indebtedness); dispose of assets outside the ordinary course (subject to specified exceptions); acquire, merge or consolidate with or into another person or entity (other than specified types of permitted acquisitions); create, incur or allow any lien on any of its property or assign any right to receive income (except for specified permitted liens); make investments (other than specified types of investments); or pay dividends, make distributions, or purchase or redeem our equity interests (each subject to specified exceptions). At ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, the Company was in compliance with these covenants.

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

Based on quoted market prices, the fair value of the ~~8.50%~~ Notes as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010 was approximately ~~$223.0~~$225.3 million and ~~$207.5~~$225.0 million, respectively.

5. Balance Sheet Components

Content Library, Net

Content library and accumulated amortization are as follows:


	As of						As of
	September 30, 2010			December 31, 2009			March 31, 2011			December 31, 2010
	(in thousands)						(in thousands)
DVD content library, gross							$	615,908		$	627,392
Streaming content library, gross								605,355			441,637

Content library, gross	$	918,720		$	742,802			1,221,263			1,069,029
Less: Accumulated amortization		(660,284	)		(596,663	)
Less: accumulated amortization								(757,776	)		(707,050	)

Total content library, net								463,487			361,979
Less: Current content library, net								265,933			181,006
		258,436			146,139
Less: Current content library, net		138,389			37,329

Content library, net	$	120,047		$	108,810		$	197,554		$	180,973

Property and Equipment, Net

Property and equipment and accumulated depreciation are as follows:


			As of							As of
	Useful Life		September 30, 2010			December 31, 2009				March 31, 2011			December 31, 2010
			(in thousands)							(in thousands)
Computer equipment		3 years	$	59,908		$	62,132		3 years	$	59,984		$	60,289
Other equipment		5 years		63,539			65,059
Computer software, including internal-use software		3 years		25,953			35,401
Operations and other equipment									5 years		91,527			72,368
Software, including internal-use software									3 years		27,911			26,961
Furniture and fixtures		3 years		11,342			12,421		3 years		12,333			11,438
Building		30 years		40,681			40,681		30 years		40,681			40,681
Leasehold improvements		Over life of lease		35,975			35,156		Over life of lease		38,354			36,530
Capital work-in-progress				16,726			15,097				5,720			16,882


Property and equipment, gross				254,124			265,947				276,510			265,149
Less: Accumulated depreciation				(129,067	)		(134,294	)			(141,710	)		(136,579	)

Property and equipment, net			$	125,057		$	131,653			$	134,800		$	128,570

InCapital work-in-progress as of March 31, 2011 consists primarily of approximately $5.5 million of operations equipment not yet placed in service.

Other Non-Current Liabilities

Other non-current liabilities consisted of the ~~third quarter of 2010, the Company wrote off fully depreciated property and equipment of $32.6 million related to assets which were no longer in existence.~~following:


	As of
	March 31, 2011		December 31, 2010
	(in thousands)
Accrued content acquisition costs	$	67,119	$	48,179
Other		23,465		21,022

Other non-current liabilities	$	90,584	$	69,201

6. Other Comprehensive Income

~~Other~~Comprehensive income was $60.1 million and $32.5 million for the three months ended March 31, 2011 and 2010, respectively. The primary difference between net income as reported and comprehensive income ~~consists of~~is unrealized gains and losses on available-for-sale securities, net of tax. ~~The components of comprehensive income are as follows:~~

   Three months ended Nine months ended
   September 30,
2010    September 30,
2009 September 30,
2010    September 30,
2009
   (in thousands)
Net income
   $ 37,967       $ 30,141    $ 113,758       $ 84,947
Other comprehensive income:

Change in unrealized gain (loss) on
available-for-sale securities, net of tax
   477       (173 ) 1,006       468

Comprehensive income
   $ 38,444       $ 29,968    $ 114,764       $ 85,415

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

7. Stockholders’ Equity

Stock Repurchases

During the three months ended September 30, 2010, the Company repurchased 530,000 shares of common stock at an average price of approximately $110 per share for an aggregate amount of approximately $59 million. Shares repurchased have been retired. Under the current stock repurchase plan, announced on June 11, 2010, the Company is authorized to repurchase up to $300 million of its common stock through the end of 2012. During the three months ended March 31, 2011, the Company repurchased 501,847 shares at an average price of $216 per share for an aggregate amount of $108.6 million. As of ~~September 30, 2010, $240.6~~March 31, 2011, $132.0 million of this authorization is remaining. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.

Shares repurchased by the Company are accounted for when the transaction is settled. ~~There~~As of March 31, 2011, there were no36,000 unsettled share repurchases at ~~September 30, 2010.~~a total cost of $8.5 million. Shares repurchased and retired are deducted from common stock for par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the shares. ~~For~~During the ~~three and nine months~~quarter ended ~~September 30, 2010, $23.1~~March 31, 2011, $22.9 million ~~and $121.9 million, respectively, were~~was deducted from retained earnings related to share repurchases.

Stock-Based Compensation

A summary of the activity related to the Company’s stock option ~~plan~~plans during the ~~nine~~three months ended ~~September 30, 2010~~March 31, 2011 is as follows:

   Options Outstanding    Weighted-Average
Remaining
Contractual Term
(in Years)    Aggregate
Intrinsic Value
(in Thousands)
   Shares
Available
for Grant Number of
Shares Weighted-
Average
Exercise Price
Balances as of December 31, 2009
   2,591,267    4,241,438    $ 22.74
Granted
   (464,178 ) 464,178    85.67
Exercised
   —      (1,391,898 ) 23.35

Balances as of September 30, 2010
   2,127,089    3,313,718    31.31       5.96       $ 433,615

Vested and exercisable at September 30, 2010
   3,313,718    31.31       5.96       $ 433,615


				Options Outstanding					Weighted-Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value (in Thousands)
	Shares Available for Grant			Number of Shares			Weighted-Average Exercise Price
Balances as of December 31, 2010		2,038,502			2,892,130		$	36.11
Granted		(112,294	)		112,294			201.07
Exercised		—			(239,057	)		28.28

Balances as of March 31, 2011		1,926,208			2,765,367			43.48		5.88	$	537,298

Vested and exercisable at March 31, 2011					2,765,367			43.48		5.88	$	537,298

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the ~~third~~first quarter of ~~2010~~2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on ~~September 30, 2010.~~March 31, 2011. This amount changes based on the fair market value of the Company’s common stock. Total intrinsic value of options exercised for the three months ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ was ~~$44.8~~$44.1 million and ~~$5.0~~$22.8 million, respectively. ~~Total intrinsic value of options exercised~~

Cash received from option exercises for the ~~nine~~three months ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ was ~~$100.7~~$6.8 million and ~~$32.6~~$9.9 million, respectively.

The following table summarizes the assumptions used to value stock option grants using the lattice-binomial model:


	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended
	2010	2009	2010	2009	March 31, 2011			March 31, 2010
Dividend yield	0%	0%	0%	0%		0	%		0	%
Expected volatility	54%	48%	46%-54%	48%-56%		52	%		46	%
Risk-free interest rate	2.97%	3.62%	2.97-3.67%	2.60%-3.62%		3.42	%		3.67	%
Suboptimal exercise factor	2.00-2.40	1.74-1.94	1.78-2.40	1.73-1.94		2.17-3.39			1.78-2.15

In the ~~nine~~three months ended ~~September 30,~~March 31, 2011, the Company used a suboptimal exercise factor of 3.39 for executives and 2.17, for non-executives, resulting in a calculated expected life of the option grants of eight years for executives and five years for non-executives. In the three months ended March 31, 2010, the Company used a suboptimal exercise factor ~~ranging from~~of 2.15 ~~to 2.40,~~ for executives and 1.78 ~~to 2.00,~~ for non-executives, resulting in a calculated expected life of the option grants of five years for executives and four years for non-executives. In the nine months ended September 30, 2009, the Company used a suboptimal exercise factor ranging from 1.87 to 1.94 for executives and 1.73 to 1.74 for non-executives, which resulted in a calculated expected life of the option grants of four years for executives and three years for non-executives.

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

The weighted-average fair value of employee stock options granted during the three months ended ~~September 30,~~March 31, 2011 and 2010 was $109.21 and ~~2009 was $56.55 and $18.07~~$27.59 per share, respectively. ~~The weighted-average fair value of employee stock options granted during the nine months ended September 30, 2010 and 2009 was $40.96 and $16.63 per share, respectively.~~

The following table summarizes the assumptions used to value employee stock purchase rights under the Company’s Employee Stock Purchase Plan (“ESPP”) for the offering periods commencing in May 2010 and May 2009, respectively, using the Black Scholes option pricing model:

   Three Months Ended September 30,
   2010 2009
Dividend yield
   0 % 0 %
Expected volatility
   45 % 55 %
Risk-free interest rate
   0.24 % 0.35 %
Expected life (in years)
   0.5    0.5

Cash received from option exercises for the three months ended September 30, 2010 and 2009 was $10.9 million and $2.7 million, respectively. Cash received from option exercises and purchases under the ESPP for the nine months ended September 30, 2010 and 2009 was $34.0 million and $26.1 million, respectively.

The following table summarizes stock-based compensation expense, net of tax, related to stock option plans and employee stock purchases for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ which was allocated as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended
	2010			2009			2010			2009			March 31, 2011			March 31, 2010
	(in thousands)												(in thousands)
Fulfillment expense	$	323		$	99		$	806		$	321		$	560		$	176
Technology and development		2,694			1,169			6,939			3,430			5,292			1,869
Marketing		777			452			2,176			1,353			1,249			643
General and administrative		3,502			1,512			9,805			4,538			5,163			2,814

Stock-based compensation expense before income taxes		7,296			3,232			19,726			9,642			12,264			5,502
Income tax benefit		(3,064	)		(1,302	)		(8,118	)		(3,833	)		(4,744	)		(2,234	)

Total stock-based compensation after income taxes	$	4,232		$	1,930		$	11,608		$	5,809		$	7,520		$	3,268

8. Income Taxes

The effective tax rates for the three months ended ~~September 30,~~March 31, 2011 and 2010 were 38.7% and ~~2009 were 42.0% and 40.3%~~40.6%, respectively. ~~The effective tax rates for the nine months ended September 30, 2010 and 2009 were 41.1% and 39.7%, respectively.~~

As of December 31, ~~2009,~~2010, the Company had ~~$13.2~~$20.7 million of gross unrecognized tax benefits. During the ~~nine~~three months ended ~~September 30, 2010,~~March 31, 2011, the Company had an increase in gross unrecognized tax benefits of approximately ~~$2.3~~$1.9 million. The gross uncertain tax positions, if recognized by the Company, will result in a reduction of approximately ~~$12.4~~$18.5 million to the ~~tax~~ provision for income taxes thereby favorably impacting the Company’s effective tax rate. The Company’s unrecognized tax benefits are classified as other non-current liabilities in the consolidated balance sheet. Income tax benefits attributable to the exercise of employee stock options of $15.1 million and $7.4 million, during the three month period ended March 31, 2011 and 2010, respectively, were recorded directly to additional paid-in-capital.

The Company includes interest and penalties related to unrecognized tax benefits within the provision for income ~~tax expense.~~taxes. As of March 31, 2011, the total amount of gross interest and penalties accrued was $2.0 million, which is classified as non-current liabilities in the consolidated balance sheet.

The Company files ~~income tax returns in the~~ U.S. federal ~~jurisdiction and all of the states where income tax is imposed. The Company is subject to U.S. federal income tax examinations for years after 2000~~ and state ~~income~~ tax ~~examinations by state taxing authorities for years after 1999.~~returns. The Company is currently under examination by the IRS for the years 2008 and 2009. The years 1997 through 2007 (which represent approximately $3.5 million of the gross unrecognized tax benefit) remain subject to examination by the IRS but the statute of limitations for these years expires in ~~various states including~~2011. The Company is currently under examination by the state of California for the years 2006 and 2007. ItThe years 1997 through 2005, as well as 2008 and 2009, remain subject to examination by the state of California.

Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the ~~liability associated with our~~balance of unrecognized tax benefits ~~will increase or decrease~~could significantly change within the next twelve months. ~~These changes may be the result of ongoing audits. At~~However, at this time, an estimate of the range of reasonably possible ~~outcomes~~adjustments to the balance of unrecognized tax benefits cannot be made.

9. Commitments and Contingencies

~~Lease Financing Obligation~~

In June 2004 and June 2006, the Company entered into two separate lease agreements for the Los Gatos, California headquarters site. Because the terms of the original facilities lease required the Company’s involvement in the construction funding of the buildings, the Company is the “deemed owner” (for accounting purposes only) of these buildings in accordance with the Financial Accounting Standard Board’s Accounting Standards Codification Topic (“ASC”) 840.40~~Leases—Sale-Leaseback Transactions~~ ~~as it applies to situations where an entity is involved with the construction funding of an asset that will be leased when the construction project is completed.~~

Accordingly, the Company recorded an asset of $40.7 million, representing the total costs of the buildings and improvements, including the costs paid by the lessor (the legal owner of the buildings), with a corresponding liability. Upon completion of construction of each building,

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

the Company did not meet the sale-leaseback criteria for derecognition of the building assets and liabilities. Therefore the leases are accounted for as financing obligations and the buildings are depreciated over a 30 year useful life. The monthly rent payments made to the lessor under the lease agreements are recorded in the Company’s financial statements as land lease expense and principal and interest on the financing liabilities.

In the first quarter of 2010, the Company extended the facility leases for the Los Gatos buildings for an additional five year term after the remaining term of the original lease, thus increasing the future minimum payments under lease financing obligations by approximately $14 million. As of September 30, 2010, the remaining future minimum payments under the lease financing obligation are $24.6 million. The leases continue to be accounted for as financing obligations and no gain or loss was recorded as a result of the lease financing modification. The lease financing obligation balance at the end of the extended lease term will be approximately $25.8 million which approximates the net book value of the buildings to be relinquished to the lessor.

Streaming Content

The Company classifies streaming content as either a current or non-current library asset in the consolidated balance sheets based on the estimated time of usage after certain criteria have been met, including availability of the content for streaming by Netflix subscribers. The Company had ~~$1,180.7~~$1,634.0 million and ~~$114.8~~$1,075.2 million of commitments at ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively, related to streaming content license agreements that do not meet ~~asset~~content library recognition criteria.

The ~~Company has entered into an agreement under which it has the obligation~~expected timing of payments for these commitments ranges from less than one year to pay license fees in exchange for certain qualifying titles that are released theatrically in the United States from 2010 through 2018. The titles to be received under the agreement are at the discretion of the content provider, subject to certain minimum requirements.more than 5 years. The license ~~fees are based on~~agreements do not meet content library recognition criteria because either the ~~quantity of titles received and domestic theatrical exhibition receipts of qualifying titles. As these titles have~~fee is not known or reasonably determinable for a specific title or it is known but the title is not yet ~~been released in theatres, the Company is unable~~available for streaming to ~~estimate the amounts to be paid under this arrangement. However, such amounts are expected to be significant.~~subscribers.

The Company also has entered into certain license agreements ~~with studios~~ that include an unspecified or a maximum number of titles that the Company may or may not receive in the ~~future. Access~~future and /or that include pricing contingent upon certain variables, such as domestic theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether the Company will receive access to these titles ~~is based on~~or what the ~~discretion of~~ultimate price per title will be. However such amounts, which are not included in the ~~studios and, as such, the Company may not receive these titles. If the Company did receive access~~commitments described above, are expected to ~~the maximum number of titles, the Company would incur up to an additional $21.6 million in commitments.~~be significant.

The Company has a license with a certain performing rights organization (“PRO”), and is currently involved in negotiations with ~~performing rights organizations (PROs)~~other PROs, that hold ~~the~~certain rights to music used in connection with streaming content. ~~The~~For the latter, the Company accrues for estimated royalties that are due to PROs and adjusts these accruals based on any changes in estimates. ~~During the third quarter of 2010,~~While the Company ~~reduced this accrual by $3.5 million as a result of lower estimated royalty rates. The~~anticipates finalizing these negotiations, the outcome of these negotiations is uncertain. Additionally, pending litigation between certain PROs and other third parties could impact our negotiations. If ~~we are~~the Company is unable to reach mutually acceptable terms with the PROs, the Company could become involved in similar litigation. The results of any negotiation or litigation may be materially different from management’s estimates.

Litigation

From time to time, in the normal course of its operations, the Company is a party to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company ~~makes~~records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company’s operations or its financial position, liquidity or results of operations.

On March 29, 2010, Parallel Networks, LLC filed a complaint for patent infringement against the Company and others in the United States District Court for the Eastern District of Texas, captionedParallel Networks, LLC v. Abercrombie & Fitch Co., et. al , Civil Action No 6:10-cv-00111-LED. The complaint alleges that the Company infringed U.S. Patent No. 6,446,111 entitled “Method and Apparatus for Client-Server Communication Using a Limited Capability Client Over a Low-Speed Communication Link,” issued on September 3, 2002. The complaint seeks unspecified compensatory and enhanced damages, interest and fees, and seeks to permanently enjoin the Company from infringing the patent in the future. With respect to this matter, management has determined that a potential loss is not probable and accordingly, no amount has been accrued. Management has determined a potential loss is reasonably possible as it is defined by ~~ASC~~the Financial Accounting Standard Board’s Accounting Standards Codification (“ASC”) 450~~Commitments and~~ Contingencies; however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.

On September 25, 2009, Alcatel-Lucent USA Inc. filed a complaint for patent infringement against the Company in the United States District Court for the Eastern District of Texas, captionedAlcatel-Lucent USA Inc. v. Amazon.com Inc., et. al, Civil Action No. 6:09-cv-422. The complaint alleges that the Company infringed U.S. Patents Nos. 5,649,131 entitled “Communications Protocol” issued on July 15, ~~1997,~~1997; 5,623,656 entitled “Script Based Data Communication System and Method Utilizing State Memory” issued on April 22, ~~1997~~1997; and 5,404,507 entitled “Apparatus and Method for Finding Records in a Database by Formulating a Query Using Equivalent Terms Which Correspond to Terms in the Input Query,” issued April 4, 1995. The complaint seeks unspecified compensatory and enhanced damages, interest, costs and

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

fees, and seeks to permanently enjoin the Company from infringing the patents in the future. With respect to this matter, management has determined that a potential loss is not probable and accordingly, no amount has been accrued. Management has determined a potential loss is reasonably possible as it is defined by ASC 450; however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.

In January through April of 2009, a number of purported anti-trust class action suits were filed against the ~~Company.~~Company in various United States Federal Courts. Wal-Mart Stores, Inc. and Walmart.com USA LLC (collectively, Wal-Mart) were also named as defendants in these suits. ~~Most of~~These cases have been transferred by the ~~suits were filed in the United States District Court for~~Judicial Panel on Multidistrict Litigation to the Northern District of California to be consolidated or coordinated for pre-trial purposes, and ~~other federal district courts around~~have been assigned the ~~country.~~multidistrict litigation number MDL-2029. A number of substantially similar suits were filed in ~~the Superior Court of the~~California State ~~of California,~~Courts, and have been consolidated in Santa Clara County. The plaintiffs, who are current or former Netflix customers, generally allege that Netflix and Wal-Mart entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices. On April 10, 2009, the Judicial Panel on Multidistrict Litigation ordered all cases pending in federal court transferred to the Northern District of California to be consolidated or coordinated for pre-trial purposes. These cases have been assigned the multidistrict litigation number MDL-2029. On March 19, 2010, plaintiffs filed a motion to certify a class consisting of “any person or entity in the United States that paid a subscription fee to Netflix on or after May 19, 2005 up to and including the date of class certification” with certain exceptions. The Court granted the motion for class ~~certification. The~~certification on December 23, 2010. A number of other cases ~~pending in the Superior Court of the State of California, Santa Clara County~~ have been ~~consolidated. In addition,~~filed in ~~May of 2009, three additional lawsuits were filed—two in the Northern District of California~~Federal and ~~one in the Superior Court of the~~ State ~~of California, San Mateo County—alleging identical conduct and seeking identical relief. In these three cases, the plaintiffs are~~courts by current or former subscribers to the online DVD rental service offered by Blockbuster Inc. ~~The two~~, alleging injury arising from similar facts. These cases ~~filed in federal court on behalf of Blockbuster subscribers~~ have been related to ~~MDL-2029.~~MDL 2029 or, in the case of the California State cases, coordinated with the cases in Santa Clara County. On ~~December 1, 2009,~~March 8, 2011, the ~~federal~~Company filed a motion for summary judgment in Federal Court ~~entered an order granting defendants’ motion~~with respect to ~~dismiss~~ the ~~two federal cases filed~~suits brought on behalf of Blockbuster subscribers. ~~Plaintiffs filed an amended complaint~~The summary judgment motion was heard on March 1, 2010. Defendants moved to dismiss the Blockbuster subscribers’ amended complaint on March 31, 2010. The Court denied the motion to dismiss on July 6, 2010. The lawsuit filed in Superior Court of the State of California, San Mateo County has been coordinated with the cases pending in Santa Clara County. The complaints, which assert violations of federal and/or state antitrust laws, seek injunctive relief, costs (including attorneys’ fees) and damages in an unspecified amount.April 20, 2011. On August 27, 2010, Wal-Mart stated that it had settled the cases ~~filed in Federal Court~~ with both the Netflix and Blockbuster plaintiffs. ~~Details of~~A hearing on the ~~settlement were not disclosed and plaintiffs have not yet filed a~~plaintiffs’ motion for preliminary approval of the settlement was heard on February 9, 2011. On March 9, 2011, the Court denied plaintiffs’ motion for preliminary approval of the settlement. On April 18, 2011, Wal-Mart ~~settlement.~~stated that it had entered into a revised settlement agreement in principle with the Netflix plaintiffs only. Netflix is not part of the settlement and continues to litigate these cases. With respect to this matter, management has determined that a potential loss is not probable and accordingly, no amount has been accrued. Management has determined a potential loss is reasonably possible as it is defined by ASC 450; however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.

On October 24, 2008, Media Queue, LLC filed a complaint for patent infringement against the Company in the United States District Court for the Eastern District of Oklahoma, captionedMedia Queue, LLC v. Netflix, Inc., et. al , Civil Action No. CIV 08-402-KEW. The complaint alleges that the Company infringed U.S. Patent No. 7,389,243 entitled “Notification System and Method for Media Queue” issued on June 17, 2008. The complaint seeks unspecified compensatory and enhanced damages, interest and fees, and seeks to permanently enjoin the Company from infringing the patent in the future. On February 24, 2009, the case was transferred to the Northern District of California. On August 14, 2009, the Company filed a motion for summary judgment of non-infringement. A hearing on the motion was held on November 17, 2009. On December 1, 2009, the Court granted the Company’s motion for summary judgment of non-infringement. On February 10, 2010, plaintiff appealed the summary judgment ruling. With respect to this matter, management has determined that a potential loss is not probable and accordingly, no amount has been accrued. Management has determined a potential loss is reasonably possible as it is defined by ASC 450; however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.

~~On December 28, 2007, Parallel Networks, LLC filed a complaint for patent infringement against the Company in the United States District Court for the Eastern District of Texas, captioned~~~~Parallel Networks, LLC v. Netflix, Inc., et. al~~ , Civil Action No 2:07-cv-562-DF. The complaint alleges that the Company infringed U.S. Patent Nos. 5,894,554 and 6,415,335 B1 entitled “System For Managing Dynamic Web Page Generation Requests by Intercepting Request at Web Server and Routing to Page Server Thereby Releasing Web Server to Process Other Requests” and “System and Method for Managing Dynamic Web Page Generation Requests”, issued on April 13, 1999 and July 2, 2002, respectively. The complaint seeks unspecified compensatory and enhanced damages, interest and fees, and seeks to permanently enjoin the Company from infringing the patent in the future. On March 10, 2010, the Company filed a motion for summary judgment of invalidity. On March 26, 2010, the Company filed a motion for summary judgment of non-infringement. The Court had set a July 28, 2010 hearing date for these motions. On August 5, 2010, the parties stipulated to dismiss the litigation. On August 9, 2010, the Court entered an Order dismissing the case pursuant to the stipulation. Netflix paid no amount to plaintiff in relation to the dismissal.

The Company is involved in other litigation matters not listed above but does not consider the matters to be material either individually or in the aggregate at this time. The Company’s view of the matters not listed may change in the future as the litigation and events related thereto unfold.

~~Netflix, Inc.~~

~~Notes to Consolidated Financial Statements—(Continued)~~

Indemnification

In the ordinary course of business, the Company ~~enters~~has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties. ~~In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the~~

The Company’s obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against ~~third parties~~third-parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.

It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances ~~involved.~~involved in each particular agreement. No amount has been accrued in the accompanying ~~consolidated~~ financial statements with respect to these indemnification ~~obligations.~~guarantees.

10. Segment Information

In September 2010, the Company began international operations by offering an unlimited streaming plan without DVDs in Canada. At that time, the Company began segmenting operating results into two segments: Domestic and International. The Company presents the segment information along the same lines that the Company’s chief operating decision maker reviews the operating results in assessing performance and allocating resources. The Company’s chief operating decision maker reviews revenue and operating income (loss) information for each of the reportable segments.

The Domestic segment derives revenue from monthly subscription services consisting of streaming content and DVD-by-mail. The International segment derives revenue from monthly subscription services consisting solely of streaming content.

Segment operating income (loss) includes allocations of “Cost of Revenues” which includes allocations of streaming content, streaming delivery and fulfillment costs, as well as allocations of “Marketing”, “Technology and Development” and “General and Administrative” operating expenses. The vast majority of the Company’s costs for “Technology and Development” and “General and Administrative” are incurred in the United States and are allocated to our Domestic segment. There are no internal revenue transactions between our reporting segments. In addition, the Company does not identify or allocate our assets by reportable segment and all of our long lived assets are held in the United States.

Information on reportable segments and reconciliation to consolidated net income is as follows:


	Three Months Ended
	March 31, 2011			March 31, 2010
	(in thousands)
Domestic
Total subscribers at end of period		22,797			13,967
Revenues	$	706,274		$	493,665
Cost of revenues and operating expenses		593,292			435,320

Segment operating income	$	112,982		$	58,345

International
Total subscribers at end of period		803
Revenues	$	12,279		$	—
Cost of revenues and operating expenses		23,021			—

Segment operating income (loss)	$	(10,742	)	$	—

Consolidated
Total subscribers at end of period		23,600			13,967
Revenues	$	718,553		$	493,665
Cost of revenues and operating expenses		616,313			435,320

Operating income	$	102,240		$	58,345
Other income (expense)		(4,000	)		(3,987	)
Provision for income taxes		38,007			22,086
Net income	$	60,233		$	32,272

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains ~~certain~~ forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited ~~to:~~to statements ~~regarding international expansion, trends in average revenue per paying subscriber, investments in our content library and increased spending for streaming content, our competitive advantage,~~regarding: our core ~~strategy, expectations with respect to~~strategy; the growth of Internet delivery of ~~content, growth in~~content; the market opportunity for streaming content; our ~~average number~~focus within the subscription segment of ~~paying subscribers, future investments in~~the entertainment video market; operating margins; liquidity; subscriber revenue; our pricing strategy; DVD usage and shipments; the fading differentiation of DVD; our content library ~~and its effects on our gross margin and liquidity, continuing legal costs, deferred tax assets~~investments; future contractual obligations; international expansion; and our ~~liquidity.~~ stock-based compensation expense for 2011.These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to ~~differ.~~differ materially from those included in forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in ~~the~~our Annual Report on Form 10-K for the year ended December 31, ~~2009~~2010 filed with the Securities and Exchange Commission (“SEC”) on February ~~22, 2010.~~18, 2011, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA.

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form ~~10-Q.~~10-Q, unless required by law.

Overview

~~Our Business~~

With more than 1623 million subscribers as of March 31, 2011, we are the world’s leading Internet subscription service for enjoying ~~movies~~TV shows and ~~TV shows.~~movies. Our subscribers can instantly watch unlimited ~~movies and~~ TV shows and movies streamed over the Internet to their TVs, computers and ~~computers~~mobile devices and, in the United States, subscribers can also receive standard definition DVDs, and their high definition successor, Blu-ray discs (collectively referred to as “DVD”), delivered quickly to their homes. We offer a variety of subscription plans, with no due dates, no late fees, no shipping fees and no pay-per-view fees. Aided by our proprietary recommendation and merchandising technology, subscribers can select from a growing library of titles that can be watched instantly and a vast array of titles on standard definition DVD, along with its high definition successor, Blu-ray (collectively referred to in this Quarterly Report as “DVD”).

~~Subscribers can:~~

Watch streaming content without commercial interruption on their computers and TVs. The viewing experience is enabled by Netflix controlled software that runs on a variety of consumer electronics devices (“Netflix Ready Devices”). These Netflix Ready Devices currently include platforms such as Blu-ray disc players, Internet-connected TVs, digital video players and game consoles.

In the United States, receive DVDs by mail and return them to us at their convenience using our prepaid mailers. After a DVD has been returned, we mail the next available DVD in a subscriber’s queue.

Our core strategy is to grow ~~a large~~our streaming subscription business ~~consisting~~domestically and globally. We are continuously improving the customer experience, with a focus on expanding our streaming content, enhancing our user interface and extending our streaming service to even more Internet-connected devices, while staying within the parameters of ~~streaming and DVD-by-mail content.~~ our operating margin targets.

By ~~combining streaming and DVD as part of~~continuously improving the ~~Netflix subscription,~~customer experience, we ~~are able to offer subscribers a uniquely compelling selection of movies and TV shows for one low monthly price. We have seen tremendous~~believe we drive additional subscriber growth in the ~~popularity of the streaming portion~~following ways:

Additional subscriber growth enables us to obtain more content, which in turn drives more subscriber growth.

Additional subscriber growth leads to greater word-of-mouth promotion of our service, ~~and we are rapidly increasing~~which in turn leads to more subscriber growth at an increasingly cost-effective marketing spend.

Additional subscriber growth enables us to invest in further improvements to our ~~investment~~service offering, which in ~~streaming content in order~~turn leads to ~~fuel this~~more subscriber growth.

~~Performance Highlights~~

The following represents our consolidated performance highlights for the three months ended ~~September 30, 2010, June 30,~~March 31, 2011, December 31, 2010 and March 31, 2010:


	Three Months Ended						Change
	March 31, 2011		December 31, 2010		March 31, 2010		Q1’11 vs. Q1’10			Q1’11 vs. Q4’10
	(in thousands except per share data and percentages)
Revenues	$	718,553	$	595,922	$	493,665		45.6	%		20.6	%
Operating income		102,240		78,453		58,345		75.2	%		30.3	%
Net income		60,233		47,095		32,272		86.6	%		27.9	%
Net income per share - diluted	$	1.11	$	0.87	$	0.59		88.1	%		27.6	%
Total subscribers at end of period		23,600		20,010		13,967		69.0	%		17.9	%
Net subscriber additions		3,590		3,077		1,699		111.3	%		16.7	%

In September ~~30, 2009~~2010, we began international operations by offering an unlimited streaming plan without DVDs in Canada. As of March 31, 2011, our international segment had over 0.8 million subscribers and had revenues of $12.3 million and an operating loss of $10.7 million for the ~~nine~~three months ended ~~September 30, 2010~~March 31, 2011. Substantially all of our revenues, operating income and ~~September 30, 2009:~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 September 30,
2009 Q3’10 vs.
Q2’10 Q3’10 vs.
Q3’09
   (in thousands except per share data, percentages and
subscriber acquisition cost)
Revenues
   $ 553,219    $ 519,819    $ 423,120    6.4 % 30.7 %
Net income
   37,967    43,519    30,141    (12.8 )% 26.0 %
Net income per share - diluted
   $ 0.70    $ 0.80    $ 0.52    (12.5 )% 34.6 %
Total subscribers at end of period
   16,933    15,001    11,109    12.9 % 52.4 %
Churn*
   3.8 % 4.0 % 4.4 % (5.0 )% (13.6 )%
Subscriber acquisition cost**
   $ 19.81    $ 24.37    $ 26.86    (18.7 )% (26.2 )%
Gross margin
   37.7 % 39.4 % 34.9 % (4.3 )% 8.0 %

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD ‘10 vs.
YTD ‘09
   (in thousands, except per share data,
percentages and subscriber acquisition cost)
Revenues
   $ 1,566,703    $ 1,225,727    27.8 %
Net income
   113,758    84,947    33.9 %
Net income per share—diluted
   $ 2.09    $ 1.43    46.2 %
Total subscribers at end of period
   16,933    11,109    52.4 %
Churn *
   3.8 % 4.4 % (13.6 )%
Subscriber acquisition cost
   $ 21.69    $ 25.58    (15.2 )%
Gross margin
   38.3 % 34.4 % 11.3 %

Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, then divided by three months. Churn for the nine months ended September 30, 2010 and 2009 is the average of Churn for the three quarters of the respective period.

**	~~Subscriber acquisition cost is defined as total marketing expense divided by total gross subscriber additions.~~

~~Critical Accounting Policies and Estimates~~

~~The preparation of consolidated financial statements in conformity with accounting principles generally accepted~~net income are still generated in the United ~~States requires management~~States. We anticipate further international expansion into an additional market in the second half of 2011 and will manage our business going forward with two distinct operating segments: Domestic (which includes the United States) and International.

We believe that DVD will be a fading differentiator given the explosive growth of streaming, and that in order to prosper in streaming we must concentrate on having the best possible streaming service. As a result, we are beginning to treat them separately in many ways. For example, our signup page for non-members is focused on streaming. While DVD rentals are still a great business for us, and we are working on solutions to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The Securities and Exchange Commission (“SEC”) has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

~~Content Accounting~~

~~We obtain content through~~sure DVD ~~direct purchases, streaming content license agreements and DVD and streaming revenue sharing agreements with studios, distributors, and other suppliers.~~

~~We acquire DVD content for the purpose of renting such content to our subscribers and earning subscription rental revenues, and, as such, we consider our direct purchase DVD library~~continues to be a ~~productive asset. Accordingly, we classify our DVD library as a non-current asset on~~profitable business for us in the consolidated balance sheets. We amortize our direct purchase DVDs, less estimated salvage value, on a “sum-of-the-months” accelerated basis over their estimated useful lives. The useful life of the new-release DVDs and back-catalog DVDs is estimated to be one year and three years respectively. In estimating the useful life of our DVDs, we consider historical utilization patterns primarily including the number of times a DVD title is shipped to subscribers in a given period as well as an estimate for lost or damaged DVDs. Historically, the utilization patterns of our DVDs have not changed significantly andahead, we do not ~~expect them~~believe it is core to ~~change significantly in~~ the future. However, if we were to amortize our DVDs over a period that is greater or shorter than our estimated useful life of one to three years, our amortization expense and results of operations could be materially impacted.

We provide a salvage value for those direct purchase DVDs that we estimate we will sell at the end of their useful lives. Use of a different salvage value would not materially impact our financial statements. Further, historically, the actual number of DVDs sold and the actual salvage value of those DVDs have not differed significantly from our estimates and, in the future, we do not expect the differences to be material to our financial position or results of operations. For those DVDs that we do not expect to sell, no salvage value is provided. We periodically evaluate the useful lives and salvage valuessuccess of our ~~DVDs.~~

The terms of certain DVD direct purchase agreements with studios and distributors provide for discounts based on type of purchases or based on volume of purchases. The discounts based on type of purchases are recorded as a reduction of DVD content library when the eligible titles are purchased. The discounts based on volume of purchases are also recorded as a reduction of DVD content library when the eligible titles are purchased and are recorded at a discount rate based on historical and estimated purchases over the title term. Historically, actual discounts have not differed significantly from estimated discounts and we do not expect the differences to be material to our financial position or results of operations.

~~We obtain content distribution rights in order to stream movies and TV shows without commercial interruption to subscribers’ computers and TVs via Netflix Ready Devices. We account for~~ streaming ~~content in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) topic 920~~~~Entertainment – Broadcasters~~ . Streaming content is generally licensed for a fixed fee for the term of the license agreement. We classify our streaming content obtained through a license agreement as either a current or non-current library in the consolidated balance sheets based on the estimated time of usage after certain criteria have been met,

including availability of the streaming content for its first showing. Any licensed streaming content payments not meeting the criteria for classification in the library are classified as prepaid content. We amortize licensed streaming content on a straight-line basis generally over the term of the related license agreements or the title’s window of availability.

We also obtain DVD and streaming content through revenue sharing agreements with studios and distributors. The terms of some revenue sharing agreements obligate us to make a generally low initial payment for certain titles, representing a minimum contractual obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of our subscription revenues or to pay a fee, based on utilization, for a defined period of time, or the title term, which typically ranges from six to twelve months for each title. The initial payment may be in the form of an upfront non-recoupable payment. This payment is capitalized in the content library in accordance with our DVD and streaming content policies as applicable. The initial payment may also be in the form of a prepayment of future revenue sharing obligations which is classified as prepaid content. This prepayment is amortized as revenue sharing obligations are incurred. If during the title term, we determine that the full prepayment will not be amortized based on utilization, a provision for the estimated difference is recorded in the period that such shortfall is deemed probable. Under the revenue sharing agreements for its DVD library, at the end of the title term, we generally have the option of returning the DVD to the studio, destroying the DVD or purchasing the DVD. In most cases, we purchase the disc where we have the ability to do so. This end of term buy-out cost is also included in DVD library.

Cash flows associated with obtaining content are classified as either operating activities or investing activities based on the underlying type of content obtained and type of arrangement. Other companies in the in-home entertainment video industry classify all cash flows associated with obtaining content as operating activities. We classify cash flows related to our content as follows:

Revenue sharing obligations incurred based on utilization as well as amortization of licensed streaming content that do not meet asset recognition criteria are classified as cash used in operating activities in the line item “net income”.

~~Changes in prepaid content are classified as operating activities.~~

The amortization of the streaming and DVD content libraries is classified as a reconciling item between net income and cash flow from operating activities in the line item “Amortization of content library”.

~~The acquisition of streaming content library is classified as cash used in operating activities in the line item “Acquisition of streaming content library”.~~

The acquisition of DVD content library, net of changes in related accounts payable, is classified as cash used in investing activities in the line item “Acquisition of DVD content library” because the DVD content library is considered a productive asset.

~~Stock-Based Compensation~~

Stock-based compensation cost at the grant date is based on the total number of option shares granted and an estimate of the fair value of the awards expected to vest and is recognized as expense ratably over the requisite service period, which is the vesting period.

We calculate the fair value of new stock-based compensation awards under our stock option plans using a lattice-binomial model. We use a Black-Scholes model to determine the fair value of employee stock purchase plan shares. These models require the input of highly subjective assumptions, including price volatility of the underlying stock. Changes in the subjective input assumptions can affect the estimate of fair value of options granted and our results of operations could be impacted.

•

~~Expected Volatility:~~ Our computation of expected volatility is based on a blend of historical volatility of our common stock and implied volatility of tradable forward call options to purchase shares of our common stock. Our decision to incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of expected volatility than historical volatility of our common stock. We include the historical volatility in our computation due to low trade volume of our tradable forward call options in certain periods precluding sole reliance on implied volatility. An increase in our computation of expected volatility from 54% to 64% would increase the total stock-based compensation expense by approximately $0.3 million.

•

~~Suboptimal Exercise Factor:~~ Our computation of the suboptimal exercise factor is based on historical option exercise behavior and the terms and vesting periods of the options granted and is determined for both executives and non-executives. An increase in the suboptimal exercise factor of 10% would increase the total stock-based compensation by approximately $0.4 million.

~~Income Taxes~~

We record a tax provision for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying the enacted tax rates applicable to future years to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. The effect on

deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.

Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future market growth, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that the deferred tax assets recorded on our balance sheet will ultimately be realized. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination.

We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit recognized in the financial statements from such position is then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At September 30, 2010, our estimated gross unrecognized tax benefits were $15.5 million of which $12.4 million, if recognized, could favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 8 to the consolidated financial statements for further information regarding income taxes.business.

Results of Operations

The following table sets forth, for the periods presented, the line items in our consolidated statements of operations as a percentage of total revenues. The information contained in the table below should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and the entirety of this Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations included in this Quarterly Report on Form 10-Q.~~Operations.

   Three Months Ended Nine Months Ended
   September 30,
2010 June 30,
2010 September 30,
2009 September 30,
2010 September 30,
2009
Revenues
   100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Cost of revenues:

Subscription
   52.9 % 51.1 % 55.1 % 52.2 % 55.3 %
Fulfillment expenses
   9.4 % 9.5 % 10.0 % 9.5 % 10.3 %

Total cost of revenues
   62.3 % 60.6 % 65.1 % 61.7 % 65.6 %

Gross margin
   37.7 % 39.4 % 34.9 % 38.3 % 34.4 %

Operating expenses:

Technology and development
   7.6 % 7.3 % 7.1 % 7.5 % 6.6 %
Marketing
   14.7 % 14.3 % 13.8 % 14.7 % 13.6 %
General and administrative
   3.1 % 3.3 % 2.7 % 3.3 % 3.1 %
Gain on disposal of DVDs
   (0.3 )% (0.4 )% (0.3 )% (0.3 )% (0.2 )%

Total operating expenses
   25.1 % 24.5 % 23.3 % 25.2 % 23.1 %

Operating income
   12.6 % 14.9 % 11.6 % 13.1 % 11.3 %
Other income (expense):

Interest expense
   (0.9 )% (0.9 )% (0.2 )% (0.9 )% (0.2 )%
Interest and other income
   0.2 % 0.1 % 0.5 % 0.1 % 0.4 %

Income before income taxes
   11.9 % 14.1 % 11.9 % 12.3 % 11.5 %
Provision for income taxes
   5.0 % 5.7 % 4.8 % 5.0 % 4.6 %

Net income
   6.9 % 8.4 % 7.1 % 7.3 % 6.9 %


	Three Months Ended
	March 31, 2010			December 31, 2010			March 31, 2010
Revenues		100.0	%		100.0	%		100.0	%

Cost of revenues:
Subscription		52.5	%		56.5	%		52.6	%
Fulfillment expenses		8.5	%		9.1	%		9.6	%

Total cost of revenues		61.0	%		65.6	%		62.2	%

Operating expenses:
Technology and development		7.1	%		7.7	%		7.6	%
Marketing		14.5	%		10.6	%		15.2	%
General and administrative		3.2	%		3.0	%		3.2	%

Total operating expenses		24.8	%		21.3	%		26.0	%

Operating income		14.2	%		13.1	%		11.8	%
Other income (expense):
Interest expense		(0.7	)%		(0.8	)%		(1.0	)%
Interest and other income		0.2	%		0.2	%		0.2	%

Income before income taxes		13.7	%		12.5	%		11.0	%
Provision for income taxes		5.3	%		4.6	%		4.5	%

Net income		8.4	%		7.9	%		6.5	%

Revenues

We derive substantially all of our revenues from monthly subscription fees and recognize subscription revenues ratably over each subscriber’s monthly subscription period. We ~~record refunds to subscribers as a reduction of revenues. We~~ currently generate substantially all of our revenues in the United States. In September 2010, we began international operations by offering an unlimited streaming plan without DVDs in Canada. We ~~launched a streaming only subscription service in Canada~~anticipate further international expansion in the ~~third quarter~~second half of ~~2010~~2011.

We offer subscription plans in the United States and ~~expect~~Canada that ~~international revenues will grow.~~

Weallow our subscribers to instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices. In the United States, we offer a variety of subscription plans ~~combining~~that, in addition to streaming, ~~movies and TV shows over the Internet and in the United States, sending~~offer subscribers DVDs by mail. The price per plan varies based on the number of DVDs that a subscriber ~~has~~may have out at any given point and based on whether the service has limited or unlimited usage. All of our unlimited plans allow the subscriber unlimited streaming to their computer or Netflix Ready Device. More than 90% of our subscriber base has chosen a 1, 2, or 3-out Unlimited plan which range in price from $8.99 to $16.99 per month.point. Customers electing access to ~~the~~ high definition Blu-ray discs in addition to standard definition DVDs pay a surcharge ranging from $1 to $4 per month for our most popular plans. In Canada, our subscription service consists of only streaming movies and TV shows over the Internet and is priced at $7.99 CAD. We anticipate that any future international markets will likewise only offer a streaming subscription.

The following table presents our ending subscriber information:


	As of									As of
	September 30, 2010			June 30, 2010			September 30, 2009			March 31, 2011			December 31, 2010			March 31, 2010
	(in thousands, except percentages)									(in thousands, except percentages)
Free subscribers		1,070			424			274			1,522			1,742			345
As a percentage of total subscribers		6.3	%		2.8	%		2.5	%
As a percentage of total subscribers (1)											6.4	%		8.7	%		2.5	%
Paid subscribers		15,863			14,577			10,835			22,078			18,268			13,622
As a percentage of total subscribers		93.7	%		97.2	%		97.5	%		93.6	%		91.3	%		97.5	%
Total subscribers		16,933			15,001			11,109			23,600			20,010			13,967

(1)	The 3.9 percentage point increase in free subscribers as a percentage of total subscribers as of March 31, 2011 as compared to March 31, 2010 is due to the expanded use of our one month free trial subscriptions over the previously used two week free trials.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended				Change			Three Months Ended				Change
	September 30, 2010		September 30, 2009		Q3’10 vs. Q3’09			March 31, 2011		March 31, 2010		Q1’11 vs. Q1’10
	(in thousands except percentages and average monthly revenue per paying subscriber)							(in thousands, except percentages and average monthly revenue per paying subscriber)
Revenues	$	553,219	$	423,120		30.7	%	$	718,553	$	493,665		45.6	%
Other data:
Domestic									706,274		493,665		43.1	%
International									12,279		—		—
Other domestic data:
Average number of paying subscribers		15,220		10,605		43.5	%		19,670		12,757		54.2	%
Average monthly revenue per paying subscriber	$	12.12	$	13.30		(8.9	)%	$	11.97	$	12.90		(7.2	)%

The ~~$130.1~~$224.9 million increase in our consolidated revenues was primarily a result of the ~~43.5%~~54.2% growth in the domestic average number of paying subscribers arising from ~~increased~~the continuous improvement to our customer experience which in turn, drives consumer awareness of ~~the compelling value proposition of streaming and DVDs by mail for one low price and other benefits of~~ our ~~service.~~service benefits. This increase was partially offset by ~~an 8.9%~~a 7.2% decline in the domestic average monthly revenue per paying subscriber to $12.12, resulting from the continued growth of our lower priced subscription plans. The total number of average paying subscribers in our 1 and 2-out plans grew by 71.6% year over year as compared to a 14.7% decline in all other plans.

~~Nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009~~

   Nine Months Ended    Change
   September 30,
2010    September 30,
2009    YTD ‘10 vs.
YTD ‘09
   (in thousands except percentages and average
monthly revenue per paying subscriber)
Revenues
   $ 1,566,703       $ 1,225,727       27.8 %
Other data:

Average number of paying subscribers
   14,026       10,164       38.0 %
Average monthly revenue per paying subscriber
   $ 12.41       $ 13.40       (7.4 )%

The $341.0 million increase in our revenues was primarily a result of the 38.0% growth in the average number of paying subscribers arising from increased consumer awareness of the compelling value proposition of streaming and DVDs by mail for one low price and other benefits of our service. This increase was partially offset by a 7.4% decline in the average monthly revenue per paying subscriber to $12.41,$11.97, resulting from the continued growth of our lower priced subscription plans. As ~~compared to~~of March 31, 2011, approximately 90% of our domestic subscriber base has chosen either the ~~same prior year period,~~unlimited streaming plan without DVDs at $7.99 per month or a 1 or 2 DVD-out unlimited plan, which are priced at $9.99 and $14.99 per month, respectively. As of March 31, 2010 approximately 72% of our domestic subscriber base had chosen either the ~~total number of average paying subscribers in our~~ 1 ~~and 2-out plans grew by 66.0% during~~or 2 DVD-out unlimited plan, as the ~~nine months ended~~unlimited streaming plan was not introduced until September ~~30, 2010 as compared to a 13.5% decline in all other plans.~~

2010.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~June 30,~~December 31, 2010


	Three Months Ended				Change			Three Months Ended				Change
	September 30, 2010		June 30, 2010		Q3’10 vs. Q2’10			March 31, 2011		December 31, 2010		Q1’11 vs. Q4’10
	(in thousands except percentages and average monthly revenue per paying subscriber)							(in thousands, except percentages and average monthly revenue per paying subscriber)
Revenues	$	553,219	$	519,819		6.4	%	$	718,553	$	595,922		20.6	%
Other data:
Domestic									706,274		592,305		19.2	%
International									12,279		3,617		239.5	%
Other domestic data:
Average number of paying subscribers		15,220		14,100		7.9	%		19,670		16,899		16.4	%
Average monthly revenue per paying subscriber	$	12.12	$	12.29		(1.4	)%	$	11.97	$	11.68		2.5	%

The ~~$33.4~~$122.6 million increase in our consolidated revenues was primarily a result of the ~~7.9%~~16.4% growth in the domestic average number of paying ~~subscribers arising from increased~~subscribers. We believe this is due to the continuous improvement to our customer experience which in turn, drives consumer awareness of ~~the compelling value proposition of streaming and DVDs by mail for one low price and other~~our service benefits ~~of our service.~~available to paying subscribers. This increase was ~~partially offset by a 1.4% decline~~also attributed to an increase in the domestic average monthly revenue per paying subscriber to $12.12, resulting from the continued growth of our lower priced subscription plans. The total number of average paying subscribers in our 1 and 2-out plans grew by 11.7% quarter over quarter as compareddue to a ~~5.3%~~price increase that went into effect in January 2011. Going forward, we believe the domestic average monthly revenue per paying subscriber will revert back to a slight decline ~~in all other plans.~~as streaming only becomes a larger part of the overall subscriber mix.

Until the average price paid by our new subscriber additions is equal to the average price paid by existing subscribers, ~~we expect~~ our average monthly revenue per paying subscriber will continue to ~~decline, as~~decline. We expect the lower priced plans to continue to grow as a percentage of our subscriber base. We are currently testing a streaming only subscription plan in the United States and may offer such a plan later in 2010. If such a plan is offered, our pricing structure will change, thus impacting our revenues and average monthly revenue per paying subscriber.

Cost of Revenues

Cost of Subscription

Cost of subscription revenues consists of ~~content delivery costs related to shipping DVDs and providing streaming content to subscribers as well as~~ expenses related to the acquisition and licensing of ~~content.~~content, as well as content delivery costs related to providing streaming content and shipping DVDs to subscribers. Costs related to free-trial periods are allocated to marketing expenses.

Content acquisition and licensing expenses consist primarily of amortization of streaming content licenses, which may or may not be recognized in streaming content library, amortization of DVD content library and revenue sharing expenses. We obtain content through streaming content license agreements, DVD direct purchases and DVD and streaming revenue sharing agreements with studios, distributors and other suppliers.

Content delivery expenses consist of the postage costs to mail DVDs to and from our paying subscribers, the packaging and label costs for the mailers and all costs associated with streaming content over the Internet. We utilize ~~third party~~third-party content delivery networks to help us efficiently stream content in high volume to our subscribers over the Internet.

Content acquisition and licensing expenses consist of costs incurred in obtaining content such as amortization of content and revenue sharing expense. We obtain content from studios, distributors and other suppliers through direct purchases, revenue sharing agreements and license agreements.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			Q3’10 vs. Q3’09			March 31, 2011			March 31, 2010			Q1’11 vs. Q1’10
	(in thousands except percentages)									(in thousands, except percentages)
Cost of Subscription	$	292,406		$	233,091			25.4	%	$	376,992		$	259,560			45.2	%
As a percentage of revenues		52.9	%		55.1	%					52.5	%		52.6	%

The ~~$59.3~~$117.4 million increase in cost of subscription revenues was due to the following factors:

Content acquisition and licensing expenses increased by $110.5 million primarily attributable to licensing of streaming content, partially offset by decreases in DVD content acquisition costs; and

Content delivery expenses increased ~~$18.4~~$6.9 million primarily due to an increase in costs associated with streaming content over the Internet resulting from an increase in the total number of hours of streaming content viewed by our subscribers.

Three months ended March 31, 2011 as compared to the three months ended December 31, 2010


	Three Months Ended						Change
	March 31, 2011			December 31, 2010			Q1’11 vs. Q4’10
	(in thousands, except percentages)
Cost of Subscription	$	376,992		$	336,756			11.9	%
As a percentage of revenues		52.5	%		56.5	%

The $40.2 million increase in cost of subscription revenues was due to the following factors:

Content acquisition and licensing expenses increased by $29.8 million. This increase was primarily attributable to licensing of streaming content, partially offset by decreases in DVD content acquisition costs; and

Content delivery expenses increased $10.4 million primarily due to a ~~9.2%~~5.6% increase in the number of DVDs mailed to paying subscribers. The increase in the number of DVDs mailed was driven by a ~~43.5%~~16.4% increase in the domestic average number of paying subscribers, partially offset by a ~~24.0%~~9.3% decline in monthly DVD rentals per domestic average paying subscriber primarily attributed to the growing popularity of our lower priced plans and growth in streaming. In addition, content delivery expenses increased due to higher costs associated with ~~our use of third party delivery networks~~streaming content over the Internet resulting from an increase in the total number of hours of streaming content viewed by our subscribers.

~~Content acquisition~~ Streaming hours are currently growing faster than DVD hours and ~~licensing expenses increased by $40.9 million primarily due to an increase resulting from investments in streaming content, partially offset by decreases in DVD content acquisition costs.~~

~~Nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009~~

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD’10 vs.
YTD’09
   (in thousands except percentages)
Cost of Subscription
   $ 817,353    $ 677,863    20.6 %
As a percentage of revenues
   52.2 % 55.3 %

~~The $139.5 million increase in cost of subscription revenues was due to the following factors:~~

Content delivery expenses increased $66.9 million primarily due to an 11.1% increase in the number of DVD’s mailed to paying subscribers. The increase in the number of DVD’s mailed was driven by a 38.0% increase in the number of average paying subscribers, partially offset by a 19.7% decline in monthly DVD rentals per average paying subscriber attributed to the growing popularity of our lower priced plans and growth in streaming. In addition, content delivery expenses increased due to higher costs associated with our use of third party delivery networks resulting from an increase in the total number of hours of streaming content viewed by our subscribers.

Content acquisition and licensing expenses increased by $72.6 million primarily due to an increase resulting from investments in streaming content, partially offset by decreases in DVD content acquisition.

~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages)
Cost of Subscription
   $ 292,406    $ 265,387    10.2 %
As a percentage of revenues
   52.9 % 51.1 %

~~The $27.0 million increase in cost of subscription revenues was due to the following factors:~~

Content delivery expenses increased $3.6 million due to higher costs associated with our use of third party delivery networks resulting from an increase in the total number of hours of streaming content viewed by our subscribers. In addition, the number of DVD’s mailed to paying subscribers increased 4.4% primarily due to the 7.9% increase in the average number of paying subscribers.

Content acquisition and licensing expenses increased by $23.4 million primarily due to an increase resulting from investments in streaming content, offset partially by decreases in DVD content acquisition costs. The increase in expense was also offset by a $3.5 million reduction in the estimated accrual for royalties that we expect DVD shipments will be flat to ~~pay to certain performing rights organizations.~~declining in future periods.

Fulfillment Expenses

Fulfillment expenses represent those expenses incurred in content processing including operating and staffing our shipping centers as well as receiving, encoding, inspecting and warehousing our content library. Fulfillment expenses also include operating and staffing our customer service centers and credit card fees.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			Q3’10 vs. Q3’09			March 31, 2011			March 31, 2010			Q1’11 vs. Q1’10
	(in thousands except percentages)									(in thousands, except percentages)
Fulfillment expenses	$	52,063		$	42,183			23.4	%	$	61,159		$	47,602			28.5	%
As a percentage of revenues		9.4	%		10.0	%					8.5	%		9.6	%

The ~~$9.9~~$13.6 million increase in fulfillment expenses was due to the following:

Credit card fees increased $8.7 million as a result of the 45.6% growth in revenues; and

Content processing and customer service expenses increased ~~$4.5~~$4.9 million primarily due to a ~~$3.8~~$4.0 million increase in ~~personnel related~~personnel-related costs resulting from ~~a 9.0% increase in headcount to support the higher volume of content delivery.~~

~~Credit card fees increased $5.4 million as a result of the 30.7% growth in revenues.~~salary increases.

~~Nine~~Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the ~~nine~~three months ended ~~September 30, 2009~~December 31, 2010

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD’10 vs.
YTD’09
   (in thousands except percentages)
Fulfillment expenses
   $ 149,212    $ 125,922    18.5 %
As a percentage of revenues
   9.5 % 10.3 %


	Three Months Ended						Change
	March 31, 2011			December 31, 2010			Q1’11 vs. Q4’10
	(in thousands, except percentages)
Fulfillment expenses	$	61,159		$	54,034			13.2	%
As a percentage of revenues		8.5	%		9.1	%

The ~~$23.3~~$7.1 million increase in fulfillment expenses was due to the following:

Content processing and customer service related costs increased $9.6 million primarily due to an $8.8 million increase in personnel related costs resulting from an 11.3% increase in headcount to support the higher volume of content delivery.

Credit card fees increased ~~$13.7~~$3.7 million as a result of the ~~27.8%~~20.6% growth in ~~revenues.~~revenues; and

~~Three months ended September 30, 2010 as compared~~

Content processing and customer service expenses increased $3.4 million primarily due to ~~the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages)
Fulfillment expenses
   $ 52,063    $ 49,547    5.1 %
As a percentage of revenues
   9.4 % 9.5 %

~~The $2.5~~a $3.1 million increase in ~~fulfillment expenses was primarily due to an increase in credit card fees of $2.0 million~~personnel-related costs resulting from ~~the 6.4% growth in revenues.~~salary increases.

Gross Margin

~~Three months ended September 30, 2010 as compared to~~

   Three Months Ended Change
   March 31,
2011 March 31,
2010 Q1’11 vs.
Q1’10
   (in thousands, except percentages and average monthly gross
profit per paying subscriber)
Gross profit
   $ 280,402    $ 186,503    50.3 %
Gross margin
   39.0 % 37.8 %
   Three Months Ended Change
   March 31,
2011 December 31,
2010 Q1’11 vs.
Q4’10
   (in thousands, except percentages and average monthly gross
profit per paying subscriber)
Gross profit
   $ 280,402    $ 205,132    36.7 %
Gross margin
   39.0 % 34.4 %

Gross margin increased from the ~~three months ended September 30, 2009~~

   Three Months Ended Change
   September 30,
2010 September 30,
2009 Q3’10 vs.
Q3’09
   (in thousands except percentages and average monthly
gross profit per paying subscriber)
Gross profit
   $ 208,750    $ 147,846    41.2 %
Gross margin
   37.7 % 34.9 %
Average monthly gross profit per paying subscriber
   $ 4.57    $ 4.65    (1.7 )%

~~The increase in~~prior periods. We believe that income from operations is a more meaningful measure than gross profit and gross margin ~~was primarily due to lower DVD content acquisition expenses per DVD mailed and a 24.0% decline in monthly DVD shipments per average paying subscriber driven by~~for managing the growing popularity of our lower priced plans and the growth in streaming. This decline was higher than the decline in average revenue per paying subscriber of 8.9%. This was offset partially by increased investments in streaming content.

~~Nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009~~

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD’10 vs.
YTD’09
   (in thousands except percentages and average monthly
gross profit per paying subscriber)
Gross profit
   $ 600,138    $ 421,942    42.2 %
Gross margin
   38.3 % 34.4 %
Average monthly gross profit per paying subscriber
   $ 4.75    $ 4.61    3.0 %

The increase in gross margin was primarily due to lower DVD content acquisition expenses per DVD mailed and a 19.7% decline in monthly DVD shipments per average paying subscriber driven by the growing popularity of our lower priced plans and the growth in streaming. This decline was higher than the decline in average revenue per paying subscriber of 7.4%. This was offset partially by increased investments in streaming content.

~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages and average monthly
gross profit per paying subscriber)
Gross profit
   $ 208,750    $ 204,885    1.9 %
Gross margin
   37.7 % 39.4 %
Average monthly gross profit per paying subscriber
   $ 4.57    $ 4.84    (5.6 )%

The decrease in gross margin was primarily attributable to increased investments in streaming content, partially offset by lower DVD content acquisition expenses per DVD mailed and a 3.5% decline in monthly DVD shipments per average paying subscriber.

We have increased and expect to continue to increase investments in our content library, and in particular may increase spending associated with streaming content. These investments would reduce our gross margin to the extent that increases in content spending, net of fulfillment costs, outpace growth in our revenues.business.

Technology and Development

Technology and development expenses consist of payroll and related costs incurred in making improvements to our service offering, including testing, maintaining and modifying our ~~Web site,~~user interface, our recommendation and merchandising technology, ~~improvements in streaming content to subscribers,~~as well as, telecommunications systems and infrastructure and other internal-use software systems. Technology and development expenses also include costs associated with computer hardware and software, ~~as well as~~and in 2010, included certain costs paid for ~~third party~~third-party Internet-based or “cloud” computing ~~systems~~services used in connection with our business.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			Q3’10 vs. Q3’09			March 31, 2011			March 31, 2010			Q1’11 vs. Q1’10
	(in thousands except percentages)									(in thousands, except percentages)
Technology and development	$	42,108		$	30,014			40.3	%	$	50,905		$	37,399			36.1	%
As a percentage of revenues		7.6	%		7.1	%					7.1	%		7.6	%

The ~~$12.1~~$13.5 million increase in technology and development expenses was primarily the result of ~~a $5.8 million~~an increase in personnel-related costs. This increase in personnel-related costs ~~and a $3.1 million increase in facilities and equipment related expenses. These increases are~~is due to a ~~20.8%~~32% growth in headcount supporting continued improvements in our service ~~and growth~~coupled with a $3.4 million increase in ~~streaming content delivered to our growing subscriber base. In addition, costs paid for cloud computing systems increased $2.7 million.~~stock-based compensation expense.

~~Nine~~Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the ~~nine~~three months ended ~~September 30, 2009~~December 31, 2010


	Nine Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			YTD’10 vs. YTD’09			March 31, 2011			December 31, 2010			Q1’11 vs. Q4’10
	(in thousands, except percentages)									(in thousands, except percentages)
Technology and development	$	117,370		$	81,333			44.3	%	$	50,905		$	45,959			10.8	%
As a percentage of revenues		7.5	%		6.6	%					7.1	%		7.7	%

The ~~$36.0~~$4.9 million increase in technology and development expenses was primarily ~~attributable to a $16.1 million~~the result of an increase in personnel-related costs. This increase in personnel-related costs ~~and a $12.6 million increase in facilities and equipment related expenses. These increases are~~is primarily due to ~~21.3%~~a 10% growth in headcount supporting ~~the~~ continued improvements into our service ~~and growth in streaming content delivered to our growing subscriber base. In addition, costs paid for cloud computing systems increased $5.1 million.~~

~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages)
Technology and development
   $ 42,108    $ 37,863    11.2 %
As a percentage of revenues
   7.6 % 7.3 %

~~The $4.2~~coupled with a $2.0 million increase in technology and development expenses was primarily attributable to a $1.9 million increase in personnel-related costs. These increases are due to a 6.8% growth in headcount supporting the continued improvements in our service as well as to the increase in streaming content delivered to our growing subscriber base. In addition, costs paid for cloud computing systems increased $1.9 million.stock-based compensation expense.

Marketing

Marketing expenses consist primarily of advertising expenses and also include payments made to our affiliates ~~including~~and consumer electronics ~~partners.~~partners and payroll related expenses. Advertising expenses include ~~marketing program expenditures and other~~ promotional activities ~~including~~such as television and online advertising as well as allocated costs of revenues relating to free trial periods. Payments to our affiliates ~~including~~and consumer electronics partners may be in the form of a ~~fixed fee~~fixed-fee or may be a revenue sharing payment. ~~Also included in marketing expense are payroll related expenses.~~

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			Q3’10 vs. Q3’09			March 31, 2011			March 31, 2010			Q1’11 vs. Q1’10
	(in thousands except percentages and subscriber acquisition cost)									(in thousands, except percentages and subscriber acquisition cost)
Marketing	$	81,238		$	58,556			38.7	%	$	104,259		$	75,219			38.6	%
As a percentage of revenues		14.7	%		13.8	%					14.5	%		15.2	%
Other data:
Other domestic data:
Gross subscriber additions		4,101			2,180			88.1	%		6,299			3,492			80.4	%
Subscriber acquisition cost	$	19.81		$	26.86			(26.2	)%	$	14.38		$	21.54			(33.2	)%
Churn											3.9	%		3.8	%		2.6	%

The ~~$22.7~~$29.0 million increase in marketing expenses was primarily attributable to a ~~$13.8~~$25.1 million increase in marketing program spending, primarily from increased spending in television and ~~online~~radio advertising, coupled with ~~growth~~an increase in our ~~consumer electronic~~online advertising and payments to our affiliates. These increases were offset by a decrease in partner ~~programs. In addition, costs of free trials increased $8.4 million primarily due to the 88.1% increase in gross~~programs and inserts. Domestic subscriber ~~additions, coupled with shipments of instant streaming discs which enable subscribers to stream content.~~

~~Subscriber~~ acquisition cost decreased primarily due to continued strong organic subscriber ~~growth coupled with more efficient marketing spending.~~growth.

~~Nine~~Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the ~~nine~~three months ended ~~September 30, 2009~~December 31, 2010


	Nine Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			YTD’10 vs. YTD’09			March 31, 2011			December 31, 2010			Q1’11 vs. Q4’10
	(in thousands, except percentages and subscriber acquisition cost)									(in thousands, except percentages and subscriber acquisition cost)
Marketing	$	230,990		$	167,029			38.3	%	$	104,259		$	62,849			65.9	%
As a percentage of revenues		14.7	%		13.6	%					14.5	%		10.6	%
Other data:
Other domestic data:
Gross subscriber additions		10,652			6,529			63.1	%		6,299			5,132			22.7	%
Subscriber acquisition cost	$	21.69		$	25.58			(15.2	)%	$	14.38		$	10.87			32.3	%
Churn											3.9	%		3.7	%		5.4	%

The ~~$64.0~~$41.4 million increase in marketing expenses was primarily attributable to a ~~$46.1~~$39.8 million increase in marketing program spending, primarily from increased spending in ~~television and~~ online advertising and payments to our affiliates, coupled with growth in our consumer electronic partner programs. In addition, costs of free trials increased $16.9 million primarily due to the 63.1% increase in gross subscriber additions, coupled with the shipment of instant streaming discs which enable subscribers to stream content.

~~Subscriber acquisition cost decreased primarily due to continued strong organic subscriber growth coupled with more efficient marketing spending.~~

~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages and subscriber
acquisition cost)
Marketing
   $ 81,238    $ 74,533    9.0 %
As a percentage of revenues
   14.7 % 14.3 %
Other data:

Gross subscriber additions
   4,101    3,059    34.1 %
Subscriber acquisition cost
   $ 19.81    $ 24.37    (18.7 )%

~~The $6.7 million increase in marketing expenses was primarily attributable to a $4.5 million increase in marketing program spending, primarily from~~ increased spending in direct mail and television ~~advertising, coupled with~~advertising. Domestic subscriber acquisition cost increased due to an increase in ~~cost of free trials of $2.1 million due to~~ the ~~34.1% increase in gross subscriber additions.~~

~~Subscriber acquisition cost decreased due to continued strong organic subscriber growth coupled with more efficient~~ marketing program spending.

General and Administrative

General and administrative expenses consist of payroll and related expenses for executive ~~finance, content acquisition~~ and administrative personnel, as well as recruiting, professional fees and other general corporate expenses. General and administrative expenses also include the gain on disposal of DVDs.

Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010


	Three Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			Q3’10 vs. Q3’09			March 31, 2011			March 31, 2010			Q1’11 vs. Q1’10
	(in thousands except percentages)									(in thousands, except percentages)
General and administrative	$	17,135		$	11,543			48.4	%	$	22,998		$	15,540			48.0	%
As a percentage of revenues		3.1	%		2.7	%					3.2	%		3.2	%

The ~~$5.6~~$7.5 million increase in general and administrative expenses was primarily attributable to an increase of $4.4 million in personnel-related, attributed to a ~~$2.0~~$2.4 million ~~release~~increase in stock-based compensation expense and a 19% increase in headcount. Legal costs increased $1.1 million primarily resulting from ongoing litigation of ~~accruals in~~claims against us.

Three months ended March 31, 2011 as compared to the three months ended September 30, 2009 that was associated with a former class action lawsuit that settled in 2008. In addition, stock-based compensation expenses increased $2.0 million primarily due to increased employee compensation allocated from total compensation to the stock option program.

~~Nine months ended September 30,~~December 31, 2010 ~~as compared to the nine months ended September 30, 2009~~


	Nine Months Ended						Change			Three Months Ended						Change
	September 30, 2010			September 30, 2009			YTD’10 vs. YTD’09			March 31, 2011			December 31, 2010			Q1’11 vs. Q4’10
	(in thousands, except percentages)									(in thousands, except percentages)
General and administrative	$	51,447		$	37,809			36.1	%	$	22,998		$	17,871			28.7	%
As a percentage of revenues		3.3	%		3.1	%					3.2	%		3.0	%

The ~~$13.6~~$5.1 million increase in general and administrative expenses was primarily attributable to an increase in personnel-related costs of $2.0 million, attributed to a ~~$6.4~~$1.4 million increase in ~~legal~~stock-based compensation expense and a 4% increase in headcount. Legal costs increased $1.5 million primarily resulting from ongoing litigation of claims against the Company as well as a $2.0 million release of accruals in the nine months ended September 30, 2009 that was associated with a former class action lawsuit that settled in 2008. In addition, stock-based compensation expenses increased $5.3 million primarily due to increased employee compensation allocated from total compensation to the stock option program.

~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands except percentages)
General and administrative
   $ 17,135    $ 17,119    0.1 %
As a percentage of revenues
   3.1 % 3.3 %
~~General and administrative expenses for the three months ended September 30, 2010 were relatively flat as compared to the three months ended June 30, 2010.~~us.
Interest Expense
Interest expense consists primarily of the interest on our 8.50% senior notes, including the amortization of debt issuance costs, as well as the interest on our lease financing obligations.
Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010

   Three Months Ended Change    Three Months Ended Change
   September 30,
2010 September 30,
2009 Q3’10 vs.
Q3’09    March 31,
2011 March 31,
2010 Q1’11 vs.
Q1’10
   (in thousands except percentages)    (in thousands, except percentages)
Interest expense
   $ 4,945    $ 674    633.7 %    $ 4,865    $ 4,959    (1.9 )%
As a percentage of revenues
   0.9 % 0.2 %    0.7 % 1.0 %
~~The $4.3 million increase in interest~~Interest expense was ~~entirely attributable to the interest expense associated with our 8.50% senior notes.~~
~~Nine months ended September 30, 2010~~relatively flat as compared to the ~~nine months ended September 30, 2009~~

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD ‘10 vs.
YTD ‘09
   (in thousands except percentages)
Interest expense
   $ 14,797    $ 2,018    633.3 %
As a percentage of revenues
   0.9 % 0.2 %
~~The $12.8 million increase in interest expense was entirely attributable to the interest expense associated with our 8.50% senior notes.~~prior period.
Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~June 30,~~December 31, 2010

   Three Months Ended Change    Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10    March 31,
2011 December 31,
2010 Q1’11 vs.
Q4’10
   (in thousands except percentages)    (in thousands, except percentages)
Interest expense
   $ 4,945    $ 4,893    1.1 %    $ 4,865    $ 4,832    0.7 %
As a percentage of revenues
   0.9 % 0.9 %    0.7 % 0.8 %
Interest expense ~~for the three months ended September 30, 2010~~ was relatively flat as compared to the ~~three months ended June 30, 2010.~~prior period.
Income Taxes
Three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009~~March 31, 2010

   Three Months Ended Change    Three Months Ended Change
   September 30,
2010 September 30,
2009 Q3’10 vs.
Q3’09    March 31,
2011 March 31,
2010 Q1’11 vs.
Q1’10
   (in thousands, except percentages)    (in thousands, except percentages)
Provision for income taxes
   $ 27,442    $ 20,330    35.0 %    $ 38,007    $ 22,086    72.1 %
Effective tax rate
   42.0 % 40.3 %    38.7 % 40.6 %
Our effective tax rate for the ~~third~~first quarter of ~~2010~~2011 was ~~42.0%~~38.7% and differed from the federal statutory rate due primarily to state ~~taxes.~~ taxes which were partially offset by the Federal and California R&D tax credits. The decrease in our effective tax rate was primarily attributable to the reinstatement of the Federal R&D credit in December 2010 not reflected in the three months ended March 31, 2010 and a lower effective tax rate for California.
Three months ended March 31, 2011 as compared to the three months ended December 31, 2010
   Three Months Ended Change
   March 31,
2011 December 31,
2010 Q1’11 vs.
Q4’10
   (in thousands, except percentages)
Provision for income taxes
   $ 38,007    $ 27,464    38.4 %
Effective tax rate
   38.7 % 36.8 %
The increase in our effective tax rate was primarily attributable to ~~a discrete detriment consisting~~the retroactive reinstatement of ~~a write-down~~the Federal R&D credit resulting in all of ~~certain deferred tax assets.~~
~~Nine months ended September 30,~~the R&D credit for 2010 ~~as compared to~~being recorded in the ~~nine months ended September 30, 2009~~

   Nine Months Ended Change
   September 30,
2010 September 30,
2009 YTD’10 vs.
YTD’09
   (in thousands, except percentages)
Provision for income taxes
   $ 79,379    $ 55,909    42.0 %
Effective tax rate
   41.1 % 39.7 %
Our effective tax rate for the nine months ended September 30, 2010 was 41.1% and differed from the federal statutory rate due primarily to state taxes. The increase in our effective tax rate was primarily attributable to a discrete detriment consistingfourth quarter of ~~a write-down of certain deferred tax assets.~~
~~Three months ended September 30, 2010 as compared to the three months ended June 30, 2010~~

   Three Months Ended Change
   September 30,
2010 June 30,
2010 Q3’10 vs.
Q2’10
   (in thousands, except percentages)
Provision for income taxes
   $ 27,442    $ 29,851    (8.1 )%
Effective tax rate
   42.0 % 40.7 %
The increase in our effective tax rate for the three months ended September 30, 2010 as compared to the three months ended June 30, 2010 was primarily attributable to a discrete detriment consisting of a write-down of certain deferred tax assets.2010.
Liquidity and Capital Resources
Our primary source of liquidity has been cash generated from operations. Additionally, in November 2009, we issued $200 million of our 8.50% senior notes due in 2017. Our primary uses of cash include payroll related expenses, shipping and packaging expenses, ~~and~~ marketing, our stock repurchase programs, the acquisition and licensing of content, and capital expenditures related to information technology and automation equipment. We expect to continue to make substantial investments to obtain content, and in particular expect to increase spending associated with streaming content. These investments could impact our liquidity and in particular our operating cash flows.
Although we currently anticipate that cash flows from operations, together with our available funds, will continue to be sufficient to meet our cash needs for the foreseeable future, we may require or choose to obtain additional financing. Our ability to obtain additional financing will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing.
On June 11, 2010, we announced that our Board of Directors authorized a stock repurchase program allowing us to repurchase $300 million of our common stock through the end of 2012. As of ~~September 30, 2010, we have purchased approximately $59.4~~March 31, 2011, $132.0 million of ~~our~~
~~common stock under~~ this ~~program.~~authorization was remaining. The timing and actual number of shares repurchased will depend on various factors, including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.
The following table highlights selected measures of our liquidity and capital resources (in thousands):

   Three Months Ended Nine Months Ended
   September 30,
2010 September 30,
2009 September 30,
2010 September 30,
2009
Net cash provided by operating activities
   $ 42,227    $ 78,311    $ 179,684    $ 219,246
Net cash (used in) provided by investing activities
   (5,606 ) 15,590    (57,898 ) (92,827 )
Net cash used in financing activities
   (30,840 ) (125,655 ) (142,902 ) (210,583 )
   Three Months Ended
   March 31,
2011 December 31,
2010 March 31,
2010
Net cash provided by operating activities
   $ 116,323    $ 96,717    $ 77,205
Net cash used in investing activities
   (73,675 ) (58,183 ) (40,825 )
Net cash (used in) provided by financing activities
   (86,728 ) 42,857    (90,743 )
Operating Activities
Cash provided by operating activities ~~decreased $36.1~~increased $39.1 million or ~~46.1%~~50.7% during the three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009,~~March 31, 2010, primarily due to an increase in cash received from subscribers for subscription fees of $240.7 million, resulting from a 54.2% increase in the domestic average number of paying subscribers. This increase was partially offset by increased ~~spending~~payments for content acquisition and licensing other than DVD content library of ~~$95.8 million. This increase was~~$145.4 million, coupled with increased content delivery expenses of ~~$18.4~~$6.9 million primarily resulting from higher costs associated with ~~our use of third party delivery networks to deliver~~delivering streaming content, ~~and a 9.2% increase in the number of DVDs mailed to subscribers,~~ increased payments for advertising and ~~payments~~ to our affiliates of ~~$13.8~~$9.5 million, increased payroll expenses of ~~$10.1~~$15.1 million, ~~due to a 11% increase in employees,~~ increased fulfillment expenses of ~~$9.9~~$13.6 million, and increased ~~current~~income tax ~~provision~~payments of ~~$7.1~~$5.5 million. ~~The increase in these expenses was partially offset by an increase in subscription revenues of $130.1 million resulting from a 43.5% increase in the average number of paying subscribers.~~
Cash provided by operating activities ~~decreased by $39.6~~increased $19.6 million or ~~18.0%~~20.3% during the ~~nine~~three months ended ~~September 30, 2010~~March 31, 2011 as compared to the ~~nine~~three months ended ~~September 30, 2009~~December 31, 2010, primarily due to an increase in cash received from subscribers for subscription fees of $114.3 million, resulting from a 16.4% increase in the domestic average number of paying subscribers. This increase was partially offset by increased ~~spending~~payments for content acquisition and licensing other than DVD content library of ~~$153.3 million. This increase was~~$42.1 million, coupled with increased content delivery expenses of ~~$66.9~~$10.5 million primarily resulting from higher costs associated with ~~our use of third party delivery networks to deliver~~delivering streaming, ~~content and an 11.1% increase in the number of DVDs mailed to subscribers,~~ increased payments for advertising and ~~payments~~ to our affiliates of ~~$46.1~~$22.1 million, increased payroll expenses of ~~$26.1~~$10.0 million ~~due to a 13% increase in employees,~~and increased fulfillment expenses of ~~$23.3 million, and increased current tax provision of $23.5~~$7.1 million. ~~The increase in these expenses was partially offset by an increase in subscription revenues of $341.0 million resulting from a 38.0% increase in the average number of paying subscribers.~~
Investing Activities
During the three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009,~~March 31, 2010, cash used in investing activities increased ~~$21.2~~$32.9 million primarily due to a ~~$45.2~~$19.2 million decrease in the proceeds from the sales and maturities of available-for-sale securities coupled with a $16.3 million increase in the purchases of available-for-sale securities. ~~This decrease was~~In addition, purchases of property and equipment increased $9.9 million due to purchases of automation equipment for our various shipping centers. These increases in cash outflows were partially offset by a $16.4 million decrease in acquisitions of DVD content library, as more DVDs were obtained through revenue sharing agreements in the third quarter of 2010 as compared to the same prior year period, and a $5.6 million decrease in purchases of available-for-sale securities.
~~During the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009, cash used in investing activities decreased $34.9 million primarily due to a $45.0~~$14.8 million decrease in acquisitions of DVD content library, as more DVDs were obtained through revenue sharing agreements as compared to the same prior year ~~period, coupled with a $29.0~~period.
During the three months ended March 31, 2011 as compared to the three months ended December 31, 2010, cash used in investing activities increased $15.5 million ~~decrease~~primarily due to an $18.1 million increase in the purchases of available-for-sale ~~securities. This decrease was partially offset by~~securities coupled with a ~~$46.3~~$5.7 million decrease in the proceeds from the sales and maturities of available-for-sale securities. These increases in cash outflows were partially offset by a $10.8 million decrease in acquisitions of DVD content library, as more DVDs were obtained through revenue sharing agreements as compared to the same prior year period.
Financing Activities
During the three months ended ~~September 30, 2010~~March 31, 2011 as compared to the three months ended ~~September 30, 2009,~~March 31, 2010, cash used in financing activities decreased ~~$94.8~~$4.0 million primarily due to ~~a decrease in repurchases of our common stock of $72.3 million coupled with a $14.5~~an $8.2 million increase in the excess tax benefits from stock-based compensation ~~and an $8.2~~partially offset by a $3.2 million ~~increase~~decrease in proceeds from the issuance of common stock.
During the ~~nine~~three months ended ~~September 30, 2010~~March 31, 2011 as compared to the ~~nine~~three months ended ~~September 30, 2009,~~December 31, 2010, cash used in financing activities ~~decreased $67.7~~increased $129.6 million primarily due to a ~~decrease~~$108.6 million increase in ~~repurchases of our common~~ stock ~~of $34.7 million~~repurchases, coupled with ~~a $25.6~~an $11.9 million ~~increase~~decrease in the excess tax benefits from stock-based compensation and a ~~$7.9~~$9.1 million ~~increase~~decrease in proceeds from the issuance of common stock.
Effect of Exchange Rates
Revenues in our International segment, as well as some of the related expenses incurred in the International segment, are denominated in the local currency. During the three months ended March 31, 2011, the gains or losses on foreign exchange transactions and the effect of exchange rate changes on cash and cash equivalents were immaterial.
Free Cash Flow
We define free cash flow as cash provided by operating and investing activities excluding the non-operational cash flows from purchases and sales of short-term ~~investments and cash flows from investment in business.~~investments. We believe free cash flow is an important liquidity
metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments, repurchase our stock, and for certain other activities. Free cash flow is considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, cash flow from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. The following table reconciles net cash provided by operating activities, a GAAP financial measure, to free cash flow, a non-GAAP financial ~~measure (in thousands):~~measure:

   Three Months Ended
   Three Months Ended Nine Months Ended    March 31,
2011 December 31,
2010 March 31,
2010
   September 30,
2010 September 30,
2009 September 30,
2010 September 30,
2009    (in thousands)
Non-GAAP free cash flow reconciliation:

Net cash provided by operating activities
   $ 42,227    $ 78,311    $ 179,684    $ 219,246       $ 116,323    $ 96,717    $ $77,205
Acquisition of DVD content library
   (29,900 ) (46,273 ) (90,993 ) (135,996 )    (22,119 ) (32,908 ) (36,902 )
Purchases of property and equipment
   (7,342 ) (9,994 ) (19,406 ) (23,499 )    (16,320 ) (14,431 ) (6,393 )
Acquisition of intangible assets
   (375 ) —      (505 ) (200 )
Proceeds from sale of DVDs
   3,109    3,345    10,908    7,230
Other assets
   48    134    (114 ) 143       1,419    2,055    3,682

Non-GAAP free cash flow
   $ 7,767    $ 25,523    $ 79,574    $ 66,924       $ 79,303    $ 51,433    $ 37,592

In comparing free cash flow to net income, the major recurring differences are stock-based compensation expense, deferred revenue, taxes, semi-annual interest payments on the Notes and content acquisition and licensing. Because consumers use credit cards to buy from us, our receivables from customers settle quickly and deferred revenue is a source of cash flow. For streaming content, we typically enter into multi-year licenses with studios and other distributors that may result in an increase in content library and a corresponding increase in liabilities in the consolidated balance sheet.
Free cash flow for the three months ended ~~September 30, 2010 decreased by $17.8 million~~March 31, 2011 as compared ~~the same period in prior year. The decrease is~~to March 31, 2010 increased $41.7 million primarily due to ~~changes~~increased net income of $28.0 million, increased stock-based compensation expense of $6.8 million, increased deferred revenue of $15.9 million and decreased tax prepayments of $10.6 million. This was partially offset by an increase in ~~cash flow from operations.~~excess streaming and DVD content payments over expenses of $20.1 million. Payments for content increased $130.6 million while content expenses increased $110.5 million.
Free cash flow for the ~~nine~~three months ended ~~September 30,~~March 31, 2011 as compared to December 31, 2010 increased ~~by $12.7~~$27.9 million ~~as compared the same period in prior year. The increase is~~ primarily due to ~~lower additions to our DVD content library~~increased net income of $13.1 million, increased stock-based compensation expense of $4.0 million, decreased tax prepayments of $9.7 million and ~~lower capital expenditures~~decreased interest payments of $8.5 million. This was partially offset by decreased deferred revenue of $8.3 million, coupled with an increase in ~~the proceeds received from the sale~~excess streaming and DVD content payments over expenses of ~~previously viewed DVDs. These increases in net cash flow were offset by changes in cash flow from operations.~~$1.5 million. Payments for content increased $31.3 million while content expenses increased $29.8 million.
Contractual Obligations
For the purposes of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment of the obligations discussed above is estimated based on information available to us as of ~~September 30, 2010.~~March 31, 2011. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. The following table summarizes our contractual obligations at ~~September 30, 2010 (in thousands):~~March 31, 2011:

   Payments due by Period    Payments due by Period
Contractual obligations (in thousands):
   Total    Less than
1 year    1-3 years    3-5 years    More than
5 years    Total    Less than
1 year(3)    1-3 years    3-5 years    More
than
5 years
8.50% senior notes
   $ 327,500       $ 17,000       $ 34,000       $ 34,000       $ 242,500       $ 319,000       $ 17,000       $ 34,000       $ 34,000       $ 234,000
Operating lease obligations
   46,674       12,639       19,147       10,467       4,421       52,414       14,132       22,574       11,566       4,142
Lease financing obligations (1)
   24,596       4,160       7,684       5,886       6,866       22,312       4,129       6,902       5,886       5,395
Content obligations(2)
   1,409,248       547,575       586,068       275,605       —         1,843,943       642,898       800,619       392,583       7,843
Other purchase obligations
   109,222       93,737       10,860       4,625       —         155,270       76,352       74,543       4,375       —

Total
   $ 1,917,240       $ 675,111       $ 657,759       $ 330,583       $ 253,787       $ 2,392,939       $ 754,511       $ 938,638       $ 448,410       $ 251,380


(1) InRepresents the ~~first quarter of 2010, we extended the facilities leases~~lease financing obligations for ~~the~~our Los Gatos, ~~buildings. See note 9~~California headquarters.
(2) Content obligations include agreements to acquire and license content that represent long-term liabilities or that are not reflected on the consolidated balance sheets. For those agreements with variable terms, we do not estimate what the total obligation may be beyond any minimum quantities and/ or pricing as of the reporting date. For those agreements that include renewal provisions that are solely at the option of the content provider, we include the commitments associated with the renewal period to the ~~consolidated financial statements for further discussion~~extent such commitments are fixed or a minimum amount is specified. For these reasons, the amounts presented in the table may not provide a reliable indicator of our ~~lease financing obligations.~~expected future cash outflows.
~~As of September 30, 2010, we had gross unrecognized tax benefits of $15.5 million.~~ We ~~are currently under examination in California for years 2006 and 2007. It is reasonably possible that the liability associated with our unrecognized tax benefits will increase or decrease within~~
the next twelve months. These changes may be the result of ongoing audits. At this time, an estimate of the range of reasonably possible outcomes, including the timing of such payments cannot be made. Therefore, potential payments are not included in the above contractual obligations table.
~~We also~~ have entered into certain license agreements ~~with studios~~ that include an unspecified or a maximum number of titles that we may or may not receive in the ~~future. Access to these titles is based on the discretion of the studios and,~~future and/or that include pricing contingent upon certain variables, such as ~~such, we may not receive these titles. If we did receive access to the maximum number of titles, we would incur up to an additional $21.6 million in commitments.~~
We have entered into an agreement under which we have the obligation to pay license fees in exchange for certain qualifying titles that are released theatrically in the United States from 2010 through 2018, subject to certain minimum and maximum requirements. The license fees are based on the number of titles received and domestic theatrical exhibition receipts for the title. As of ~~titles. As~~the reporting date, it is unknown whether we will receive access to these titles ~~have not yet been released in theatres, we are unable to estimate~~or what the ~~amounts to be paid under this arrangement and accordingly~~ultimate price per title will be. Accordingly such amounts are not reflected in the above contractual obligations table. However, such amounts are expected to be ~~significant.~~significant and the expected timing of payments for these commitments could range from one year to more than five years.
~~We anticipate entering into other agreements~~
(3) For purposes of this table, less than one year does not include liabilities which are reflected on the consolidated balance sheets.
As of March 31, 2011, we had gross unrecognized tax benefits of $22.6 million and an additional $2.0 million for gross interest and penalties classified as non-current liabilities in the consolidated balance sheet. At this time, we are not able to ~~license streaming content, which if consummated, would result~~make a reasonably reliable estimate of the timing of payments in ~~significant additional commitments.~~individual years due to uncertainties in the timing of tax audit outcomes; therefore, such amounts are not included in the above contractual obligation table.
Off-Balance Sheet Arrangements
As part of our ongoing business, we do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. Accordingly, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.
Indemnification
The information set forth under Note 9 in the notes to the consolidated financial statements under the caption “Indemnification” is incorporated herein by ~~reference~~reference.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
~~Recent~~Content Accounting ~~Pronouncements~~
~~There~~We obtain content through streaming content license agreements, DVD direct purchases and DVD and streaming revenue sharing agreements with studios, distributors and other suppliers.
We obtain content distribution rights in order to stream TV shows and movies to subscribers’ TVs, computers and mobile devices. Streaming content is generally licensed for a fixed-fee for the term of the license agreement which may have ~~been no recent accounting pronouncements~~multiple windows of availability. The license agreement may or may not be recognized in content library.
When the streaming license fee is known or reasonably determinable for a specific title and the specific title is first available for streaming to subscribers, the title is recognized on the consolidated balance sheets as current content library for the portion available for streaming within one year and as non-current content library for the remaining portion. New titles recognized in the content library are classified in the line item “Acquisition of streaming content library” within net cash provided by operating activities in the consolidated statements of cash flows. We amortize the content library on a straight-line basis over each title’s window of availability. The amortization is classified in “Cost of revenues - Subscription” in the consolidated statements of operations and in the line item “Amortization of content library” within net cash provided by operating activities in the consolidated statements of cash flows. For the titles recognized in content library, the license fees due but not paid are classified on the consolidated balance sheets as “Accounts payable” for the amounts due within one year and as “Other non-current liabilities” for the amounts due beyond one year. Changes in these liabilities are classified in the line items “Accounts payable” and “Other assets and liabilities” within net cash provided by operating activities in the consolidated statement of cash flows. We record the streaming content library assets and their related liability on our consolidated balance sheet at the gross amount of the liability. Commitments for the titles not yet available for streaming are not yet recognized in the content library and are included in Note 9 to the consolidated financial statements.
When the streaming license fee is not known or reasonably determinable for a specific title, the title does not meet the criteria for recognition in the content library. The license fee is not known or reasonably determinable for a specific title in fixed fee license agreements that do not specify the number of titles, the license fee per title and the windows of availability per title. Over the term of these agreements, we typically make periodic fixed prepayments that are classified in prepaid content on the consolidated balance sheets. We amortize the license fees on a straight-line basis over the term of each license agreement. The amortization is classified in cost of subscription in the consolidated statements of operations and in the line item “Net income” within net cash provided by operating activities in the consolidated statements of cash flows. Changes in prepaid content are classified within net cash provided by operating activities in the line item “Prepaid content” in the consolidated statements of cash flows. Commitments for licenses that do not meet the criteria for recognition in the content library are included in Note 9 to the consolidated financial statements.
We acquire DVD content for the purpose of renting such content to our subscribers and earning subscription rental revenues, and, as such, we consider our direct purchase DVD library to be a productive asset. Accordingly, we classify our DVD library as a non-current asset on the consolidated balance sheets. The acquisition of DVD content library, net of changes in ~~accounting pronouncements during~~related liabilities, is classified in the ~~nine~~line item “Acquisition of DVD content library” within cash used in investing activities in the consolidated statements of cash flows because the DVD content library is considered a productive asset. Other companies in the in-home entertainment video industry classify these cash flows as operating activities. We amortize our direct purchase DVDs, less estimated salvage value, on a “sum-of-the-months” accelerated basis over their estimated useful lives. The useful life of the new release DVDs and back-catalog DVDs is estimated to be one year and three years, respectively. In estimating the useful life of our DVDs, we consider historical utilization patterns, primarily the number of times a DVD title is shipped to subscribers in a given period, as well as an estimate for lost or damaged DVDs. The amortization of the DVD content library is classified in cost of subscription in the consolidated statement of operations and in the line item “Amortization of content library” within net cash provided by operating activities in the consolidated statements of cash flows.
We also obtain DVD and streaming content through revenue sharing agreements with studios and distributors. Revenue sharing obligations incurred based on utilization are classified in cost of subscription in the consolidated statements of operations and in the line item “Net income” within net cash provided by operating activities in the consolidated statements of cash flows. The terms of some revenue sharing agreements obligate us to make a low initial payment for certain titles, representing a minimum contractual obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of our subscription revenues or to pay a fee, based on utilization, for a defined period of time, or the title term, which typically ranges from six to twelve months ~~ended September 30, 2010,~~for each title. The initial payment may be in the form of an upfront non-refundable payment. This payment is capitalized in the content library in accordance with our DVD and streaming content policies as ~~compared~~applicable. The initial payment may also be in the form of a prepayment of future revenue sharing obligations which is classified as prepaid content. This payment is amortized as revenue sharing obligations are incurred. Under the revenue sharing agreements for our DVD library, at the end of the title term, we generally have the option of returning the DVDs to the ~~recent accounting pronouncements described~~studio, destroying the DVDs or purchasing the DVDs. In most cases, we purchase the DVDs when we have the ability to do so. This end of term buy-out is also included in DVD library at the time of purchase.
Stock-Based Compensation
Stock-based compensation cost at the grant date is based on the total number of options granted and an estimate of the fair value of the awards expected to vest and is recognized as expense ratably over the requisite service period, which is the vesting period.
We calculate the fair value of new stock-based compensation awards under our stock option plans using a lattice-binomial model. We use a Black-Scholes model to determine the fair value of employee stock purchase plan shares. These models require the input of highly subjective assumptions, including price volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of options granted and our results of operations could be impacted.
•
Expected Volatility: Our computation of expected volatility is based on a blend of historical volatility of our common stock and implied volatility of tradable forward call options to purchase shares of our common stock. Our decision to incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of expected volatility than historical volatility of our common stock. We include the historical volatility in our computation due to low trade volume of our tradable forward call options in certain periods thereby precluding sole reliance on implied volatility. An increase of 10% in our computation of expected volatility would increase the total stock-based compensation expense by approximately $0.7 million.
•
Suboptimal Exercise Factor: Our computation of the suboptimal exercise factor is based on historical option exercise behavior and the terms and vesting periods of the options granted and is determined for both executives and non-executives. An increase in the suboptimal exercise factor of 10% would increase the total stock-based compensation expense by approximately $0.5 million.
Income Taxes
We record a provision for income taxes for the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory tax rates to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits for which future realization is uncertain.
Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our ~~Annual Report on Form 10-K for the year ended December 31, 2009, that are of significance, or potential significance, to us.~~consolidated financial statements.
In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that it is more likely than not that substantially all deferred tax assets recorded on our balance sheet will ultimately be realized. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination.
We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. At March 31, 2011, our estimated gross unrecognized tax benefits were $22.6 million of which $18.5 million, if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 8 to the consolidated financial statements for further information regarding income taxes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For financial market risks related to changes in interest rates, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, ~~2009.~~2010. Our exposure to market risk has not changed significantly since December 31, ~~2009.~~2010.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Netflix have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended ~~September 30, 2010~~March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION

Item 1. Legal Proceedings
The information set forth under Note 9 in the notes to the consolidated financial statements under the caption “Litigation” is incorporated herein by reference.

Item 1A. Risk Factors
There have been no material changes from risk factors as previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2009 except for the following additional Risk Factor:~~
~~We could be subject to economic, political, regulatory and other risks arising from our international operations.~~
We recently launched a streaming only subscription service in Canada and anticipate further international expansion. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that are different from and incremental to from those in the United States. In addition to the risks that we face in the United States our international operations involve risks that could adversely affect our business, including:2010.

~~the need to adapt our content and user interfaces for specific cultural and language differences;~~
~~difficulties and costs associated with staffing and managing foreign operations;~~
~~management distraction;~~
~~political or social unrest and economic instability;~~
~~compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials;~~
~~difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions;~~
~~unexpected changes in regulatory requirements;~~
~~less favorable foreign intellectual property laws;~~
~~adverse tax consequences;~~
~~fluctuations in currency exchange rates, which could impact revenues and expenses of our international operations and expose us to foreign currency exchange rate risk;~~
~~profit repatriation and other restrictions on the transfer of funds;~~
~~new and different sources of competition;~~
~~different and more stringent user protection, data protection, privacy and other laws; and~~
~~availability of reliable broadband connectivity and wide area networks in targeted areas for expansion.~~
~~Our failure to manage any of these risks successfully could harm our future international operations and our overall business, and results of our operations.~~
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Stock repurchases during the three months ended ~~September 30, 2010~~March 31, 2011 were as follows:

Period
   Total Number of
Shares Purchased    Average Price
Paid per Share    Total Number of Shares
Purchased as Part of
Publicly Announced
Programs    Maximum Dollar Value that
May Yet Be Purchased
Under the Program (1)
July 1, 2010 – July 31, 2010
   505,000    $ 110.96    505,000    $ 243,156,820
August 1, 2010 – August 31, 2010
   25,000       100.85       25,000       240,635,672
September 1, 2010 – September 30, 2010
   —         —         —         240,635,672

Total
   530,000       $ 110.48       530,000       240,635,672

Period
   Total Number of
Shares Purchased    Average Price
Paid per Share    Total Number of Shares
Purchased as Part of
Publicly Announced
Programs    Maximum Dollar Value
that May Yet Be Purchased
Under the Program (1)
January 1, 2011 – January 31, 2011
   —         $ —         —         $ 240,635,672
February 1, 2011 – February 28, 2011
   211,600       223.91    211,600       193,257,307
March 1, 2011 – March 31, 2011
   290,247       211.06       290,247       131,996,717

Total
   501,847       $ 216.48       501,847       131,996,717


(1) On June 11, 2010, the Company announced that its Board of Directors authorized a stock repurchase plan that enables the Company to repurchase up to $300 million of its common stock through the end of 2012. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.
Item 6. Exhibits
(a) Exhibits:

Exhibit
Number

Exhibit Description
   Incorporated by Reference    Filed
Herewith
      Form    File No.    Exhibit    Filing Date
3.1    Amended and Restated Certificate of Incorporation    10-Q    000-49802       3.1       August 2, 2004
3.2    Amended and Restated Bylaws    8-K    000-49802       3.1       March 20, 2009
3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation    10-Q    000-49802       3.3       August 2, 2004
4.1    Form of Common Stock Certificate    S-1/A    333-83878       4.1       April 16, 2002
4.2    Indenture, dated November 6, 2009, among Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, Nation Association, relating to the 8.50% Senior Notes due 2017.    8-K    000-49802       4.1       November 9, 2009
10.1†    Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors    S-1/A    333-83878       10.1       March 20, 2002
10.2†    2002 Employee Stock Purchase Plan    Def 14A    000-49802       A       April 8, 2010
10.3†    Amended and Restated 1997 Stock Plan    S-1/A    333-83878       10.3       May 16, 2002
10.4†    Amended and Restated 2002 Stock Plan    Def 14A    000-49802       A       March 31, 2006
10.5      Amended and Restated Stockholders’ Rights Agreement    S-1    333-83878       10.5       March 6, 2002
10.8†    Description of Director Equity Compensation Plan    8-K    000-49802       99.1       June 16, 2010
10.9†    Description of Director Equity Compensation Plan    8-K    000-49802       10.1       December 28, 2009
10.10†    Amended and Restated Executive Severance and Retention Incentive Plan    10-Q    000-49802       10.10       May 5, 2009
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
  32.1*    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                X
101    The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 filed with the SEC on July 27, 2010, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009, (ii) Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009, (iii) Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2010 and 2009 and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.                X
Exhibit
Number

Exhibit Description

Incorporated by Reference

Filed
Herewith

Form

File No.

Exhibit

Filing Date

3.1    Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.1    August 2, 2004
3.2    Amended and Restated Bylaws    8-K    000-49802    3.1    March 20, 2009
3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.3    August 2, 2004
4.1    Form of Common Stock Certificate    S-1/A    333-83878    4.1    April 16, 2002
4.2    Indenture, dated November 6, 2009, among Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, Nation Association, relating to the 8.50% Senior Notes due 2017.    8-K    000-49802    4.1    November 9, 2009
10.1†    Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors    S-1/A    333-83878    10.1    March 20, 2002
10.2†    2002 Employee Stock Purchase Plan    Def 14A    000-49802    A    April 8, 2010
10.3†    Amended and Restated 1997 Stock Plan    S-1/A    333-83878    10.3    May 16, 2002
10.4†    Amended and Restated 2002 Stock Plan    Def 14A    000-49802    A    March 31, 2006
10.5    Amended and Restated Stockholders’ Rights Agreement    S-1    333-83878    10.5    March 6, 2002
10.8†    Description of Director Equity Compensation Plan    8-K    000-49802    99.1    June 16, 2010
10.9†    Description of Director Equity Compensation Plan    8-K    000-49802    10.1    December 28, 2009
10.10†    Amended and Restated Executive Severance and Retention Incentive Plan    10-Q    000-49802    10.10    May 5, 2009
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
32.1*    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002                X
101    The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed with the SEC on April 27, 2011, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010, (ii) Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.                X

* These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
† Indicates a management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NETFLIX, INC.
Dated: ~~October 25, 2010~~ April 27, 2011 By:
/S s /    REED HASTINGS
Reed Hastings

Chief Executive Officer
(Principal executive officer)
Dated: ~~October 25, 2010~~ April 27, 2011 By:
/S/ B~~ARRY~~ MCC~~ARTHY~~        s /    David Wells
~~Barry McCarthy~~David Wells

Chief Financial Officer
(Principal financial and accounting officer)
EXHIBIT INDEX

Exhibit
Number

Exhibit Description
   Incorporated by Reference    Filed
Herewith
      Form    File No.    Exhibit    Filing Date
3.1    Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.1    August 2, 2004
3.2    Amended and Restated Bylaws    8-K    000-49802    3.1    March 20, 2009
3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.3    August 2, 2004
4.1    Form of Common Stock Certificate    S-1/A    333-83878    4.1    April 16, 2002
4.2    Indenture, dated November 6, 2009, among Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, Nation Association, relating to the 8.50% Senior Notes due 2017.    8-K    000-49802    4.1    November 9, 2009
10.1†    Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors    S-1/A    333-83878    10.1    March 20, 2002
10.2†    2002 Employee Stock Purchase Plan    Def 14A    000-49802    A    April 8, 2010
10.3†    Amended and Restated 1997 Stock Plan    S-1/A    333-83878    10.3    May 16, 2002
10.4†    Amended and Restated 2002 Stock Plan    Def 14A    000-49802    A    March 31, 2006
10.5      Amended and Restated Stockholders’ Rights Agreement    S-1    333-83878    10.5    March 6, 2002
10.8†    Description of Director Equity Compensation Plan    8-K    000-49802    99.1    June 16, 2010
10.9†    Description of Director Equity Compensation Plan    8-K    000-49802    10.1    December 28, 2009
10.10†    Amended and Restated Executive Severance and Retention Incentive Plan    10-Q    000-49802    10.10    May 5, 2009
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
  32.1*    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                X
101    The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 filed with the SEC on July 27, 2010, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009, (ii) Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009, (iii) Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2010 and 2009 and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.                X
Exhibit
Number

Exhibit Description

Incorporated by Reference

Filed
Herewith

Form

File No.

Exhibit

Filing Date

  3.1    Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.1    August 2, 2004
  3.2    Amended and Restated Bylaws    8-K    000-49802    3.1    March 20, 2009
  3.3    Certificate of Amendment to the Amended and Restated Certificate of Incorporation    10-Q    000-49802    3.3    August 2, 2004
  4.1    Form of Common Stock Certificate    S-1/A    333-83878    4.1    April 16, 2002
  4.2    Indenture, dated November 6, 2009, among Netflix, Inc., the guarantors from time to time party thereto and Wells Fargo Bank, Nation Association, relating to the 8.50% Senior Notes due 2017.    8-K    000-49802    4.1    November 9, 2009
10.1†    Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors    S-1/A    333-83878    10.1    March 20, 2002
10.2†    2002 Employee Stock Purchase Plan    Def 14A    000-49802    A    April 8, 2010
10.3†    Amended and Restated 1997 Stock Plan    S-1/A    333-83878    10.3    May 16, 2002
10.4†    Amended and Restated 2002 Stock Plan    Def 14A    000-49802    A    March 31, 2006
10.5 �� Amended and Restated Stockholders’ Rights Agreement    S-1    333-83878    10.5    March 6, 2002
10.8†    Description of Director Equity Compensation Plan    8-K    000-49802    99.1    June 16, 2010
10.9†    Description of Director Equity Compensation Plan    8-K    000-49802    10.1    December 28, 2009
10.10†    Amended and Restated Executive Severance and Retention Incentive Plan    10-Q    000-49802    10.10    May 5, 2009
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                X
32.1*    Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                X
101    The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 filed with the SEC on April 27, 2011, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010, (ii) Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 and (iv) the Notes to the Consolidated Financial Statements, tagged as blocks of text.                X

* These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.
† Indicates a management contract or compensatory plan.

3733


	September 30, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Corporate debt securities	$	100,760	$	1,408	$	(51	)	$	102,117
Government and agency securities		37,842		674		—			38,516
Asset and mortgage backed securities		3,028		172		(128	)		3,072

	$	141,630	$	2,254	$	(179	)	$	143,705


	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Corporate debt securities	$	82,362	$	915	$	(106	)	$	83,171
Government and agency securities		96,998		72		(416	)		96,654
Asset and mortgage backed securities		6,262		143		(212	)		6,193

	$	185,622	$	1,130	$	(734	)	$	186,018


	(in thousands)
Due within one year	$	21,388
Due after one year and through 5 years		119,315
Due after 5 years and through 10 years		—
Due after 10 years		3,002

Total short-term investments	$	143,705


	Fair Value Measurements at September 30, 2010
	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Current Assets:
Money market funds (1)	$	217	$	217	$	—	$	—
Fixed income securities (2)		155,904		—		155,904		—

Total current assets		156,121		217		155,904		—

Non-current Assets:
Money market funds (3)		3,729		3,729		—		—

Total assets	$	159,850	$	3,946	$	155,904	$	—


	Fair Value Measurements at December 31, 2009
	Total		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Current Assets:
Money market funds (1)	$	690	$	690	$	—	$	—
Fixed income securities (4)		186,018		—		186,018		—

Total current assets		186,708		690		186,018		—

Non-current Assets:
Money market funds (3)		2,829		2,829		—		—

Total assets	$	189,537	$	3,519	$	186,018	$	—


	Payments due by Period										Payments due by Period
Contractual obligations (in thousands):	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years		Total		Less than 1 year(3)		1-3 years		3-5 years		More than 5 years
8.50% senior notes	$	327,500	$	17,000	$	34,000	$	34,000	$	242,500	$	319,000	$	17,000	$	34,000	$	34,000	$	234,000
Operating lease obligations		46,674		12,639		19,147		10,467		4,421		52,414		14,132		22,574		11,566		4,142
Lease financing obligations (1)		24,596		4,160		7,684		5,886		6,866		22,312		4,129		6,902		5,886		5,395
Content obligations(2)		1,409,248		547,575		586,068		275,605		—		1,843,943		642,898		800,619		392,583		7,843
Other purchase obligations		109,222		93,737		10,860		4,625		—		155,270		76,352		74,543		4,375		—

Total	$	1,917,240	$	675,111	$	657,759	$	330,583	$	253,787	$	2,392,939	$	754,511	$	938,638	$	448,410	$	251,380


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value that May Yet Be Purchased Under the Program (1)
July 1, 2010 – July 31, 2010		505,000	$	110.96		505,000	$	243,156,820
August 1, 2010 – August 31, 2010		25,000		100.85		25,000		240,635,672
September 1, 2010 – September 30, 2010		—		—		—		240,635,672

Total		530,000	$	110.48		530,000		240,635,672


		NETFLIX, INC.

Dated: ~~October 25, 2010~~	April 27, 2011	By:	/S s / REED HASTINGS
			Reed Hastings
			Chief Executive Officer (Principal executive officer)

Dated: ~~October 25, 2010~~	April 27, 2011	By:	/S/ B~~ARRY~~ MCC~~ARTHY~~ s / David Wells
			~~Barry McCarthy~~David Wells
			Chief Financial Officer (Principal financial and accounting officer)

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