Netflix (NFLX) 8-K Netflix Announces Q2 2005 Financial Results

Exhibit 99.1

FOR IMMEDIATE RELEASE	IR CONTACT:	Deborah Crawford
Monday, July 25, 2005		Director of Investor Relations
		408 317-3712
	PR CONTACT:	Ken Ross
		VP, Corporate Communications
		408 317-3931

Netflix Announces Q2 2005 Financial Results

GAAP Net Income of $5.7 million, Revenue of $164.5 million

and Raises 2005 Net Income Guidance

Los Gatos, Calif. – July 25, 2005 – Netflix (Nasdaq: NFLX) today reported results for the second quarter ended June 30, 2005.

For the second quarter:

• Revenue was $164.5 million

• Subscribers increased 53 percent year-over-year to 3.196 million

• Churn declined to near-record low of 4.7%

“Our business performed impressively across all key operating measures in the second quarter, reflecting the broadening consumer appeal of our service and the rising competitive strength of our organization,” said Reed Hastings, Netflix co-founder and chief executive officer. “Looking at the second half of 2005, we’re confident of hitting four million subscribers by year’s end and expect to reach that milestone profitably and as the clear-cut market leader.”

Second-Quarter 2005 Financial Highlights

Revenue for the second quarter of 2005 was a record $164.5 million, representing 37 percent year-over-year growth from $120.3 million for the second quarter of 2004, and 7 percent quarter-over-quarter growth from $154.1 million for the first quarter of 2005.

GAAP net income for the second quarter of 2005 was $5.7 million, or $0.09 per diluted share, compared to GAAP net income of $2.9 million, or $0.04 per diluted share, for the second quarter of 2004 and a GAAP net loss of $8.8 million, or $0.17 per share, for the first quarter of 2005. Management had guided to a GAAP net loss for the second quarter of $2.2 million to $7.2 million. The outperformance is due to a number of factors including: lower-than-expected marketing, better-than-expected cost management as well as lower than expected stock-based compensation expense.

Non-GAAP net income was $9.1 million, or $0.14 per diluted share, for the second quarter of 2005, compared to non-GAAP net income of $7.0 million, or $0.11 per diluted share for the second quarter of 2004 and non-GAAP net loss of $4.5 million, or $0.09 per share, for the first quarter of 2005. Non-GAAP net income (loss) equals net income (loss) on a GAAP basis before stock-based compensation expense.

Gross margin for the second quarter of 2005 was 39.0 percent compared to 42.0 percent for the second quarter of 2004 and 38.4 percent for the first quarter of 2005.

Free cash flow¹ for the second quarter of 2005 was positive $1.8 million, compared to positive $6.3 million in the second quarter of 2004 and negative $8.9 million for the first quarter of 2005.

Cash provided by operating activities for the second quarter of 2005 was $36.5 million, compared to $32.0 million for the second quarter of 2004 and $29.4 million for the first quarter of 2005.

Subscriber acquisition cost² for the second quarter of 2005 was $37.25 per gross subscriber addition, compared to $35.12 for the same period of 2004 and $37.89 for the first quarter of 2005.

Churn³ for the second quarter of 2005 was 4.7 percent, compared to 5.6 percent for the second quarter of 2004 and 5.0 percent for the first quarter of 2005. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Subscribers. Netflix ended the second quarter of 2005 with approximately 3,196,000 total subscribers, representing 53 percent year-over-year growth from 2,093,000 total subscribers at the end of the second quarter of 2004 and 6 percent sequential growth from 3,018,000 subscribers at the end of the first quarter of 2005.

During the quarter Netflix acquired 707,000 gross subscriber additions, representing 21 percent year-over-year growth from 583,000 gross subscriber additions acquired in the second quarter of 2004 and 25 percent quarter-over-quarter decline from 945,000 gross subscriber additions acquired in the first quarter of 2005.

Of the 3,196,000 total subscribers at quarter end, 97 percent, or 3,109,000, were paid subscribers. The other 3 percent, or 87,000, were free subscribers. Paid subscribers represented 97 percent of total subscribers at the end of the second quarter of 2004 and 96 percent of total subscribers at the end of the first quarter of 2005.

Business Outlook

The Company’s performance expectations for the third and fourth quarters of 2005 and the full year of 2005 are as follows:

Third Quarter 2005

• Ending subscribers of 3.35 million to 3.50 million

• Revenue of $172.5 million to $176.5 million

• GAAP net income of $4.5 million to $8.0 million

Fourth Quarter 2005

• Ending subscribers of 3.85 million to 4.05 million

• Revenue of $187 million to $193 million

• GAAP net income of $1.0 million to $6.0 million

¹ Free cash flow is defined as cash provided by operating activities less cash used in investing activities excluding purchases and sales of short-term investments.

² Subscriber acquisition cost is defined as the total marketing expense on the Company’s Statement of Operations divided by total gross subscriber additions during the quarter.

³ Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months.

Full Year 2005

• Ending subscribers of 3.85 million to 4.05 million, from previous guidance of 3.85 million to 4.15 million

• Revenue of $678.1 million to $688.1 million, from previous guidance of $660 million to $685 million

• GAAP net income of $2.4 million to $11.9 million, from previous guidance of a loss of $5 million to $15 million

Float and Trading Plans

The Company estimates the public float at approximately 46,279,628 shares as of June 30, 2005, up 1 percent from 45,813,910 shares as of March 31, 2005, based on registered shares held in street name with the Depository Trust and Clearing Corporation. No outstanding shares are subject to a lock-up agreement of any kind. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All open market sales are made pursuant to the terms of 10b5-1 Trading Plans approved by the Company and generally adopted no less than three months prior to the first date of sale under such plan.

Earnings Call

The Netflix earnings call will be webcast today at 5:00 p.m. Eastern Time / 2:00 p.m. Pacific Time, and may be accessed athttp://ir.netflix.com. Following the conclusion of the webcast, a replay of the call will be available via Netflix’s website athttp://ir.netflix.com. For those without access to the Internet, a replay of the call will be available from approximately 5:00 p.m. Pacific Time on July 25, 2005 through July 31, 2005. To listen to a replay, call (719) 457-0820, access code 1394102.

Use of Non-GAAP Measures

Management believes that non-GAAP net income is a useful measure of operating performance because it excludes the non-cash impact of stock option accounting. In addition, management believes that free cash flow is a useful measure of liquidity because it excludes the non-operational cash flows from purchases and sales of short-term investments and cash flows from financing activities. However, these non-GAAP measures should be considered in addition to, not as a substitute for, or superior to net income and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. A reconciliation to the GAAP equivalents of these non-GAAP measures is contained in tabular form on the attached unaudited financial statements.

About Netflix

Netflix (Nasdaq: NFLX) is the world’s largest online movie rental service, providing more than three million subscribers access to over 50,000 DVD titles. Under the company’s most popular program, for $17.99 a month, Netflix subscribers rent as many DVDs as they want and keep them as long as they want, with three movies out at a time. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by the USPS from regional shipping centers located throughout the United States. Netflix can reach nearly 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than 500 million movie ratings. Netflix also allows members to share and recommend movies to one another through its Friends^™feature. For more information, visitwww.netflix.com.

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding our subscriber growth, revenue and GAAP net income for the third and fourth quarters and full year of 2005. The forward-looking statements in this release are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: impacts arising out of competition, our ability to manage our growth, in particular managing our subscriber acquisition cost as well as the mix between revenue sharing titles and titles not subject to revenue sharing that are delivered to our subscribers; our ability to attract new subscribers and retain

existing subscribers; changes in pricing and availability for advertising space; fluctuations in consumer usage of our service, customer spending on DVD players, DVDs and related products; disruption in service on our website or with our computer systems; deterioration of the U.S. economy or conditions specific to online commerce or the filmed entertainment industry; conditions that effect our delivery through the U.S. Postal Service, including increases in first class postage; increases in the costs of acquiring DVDs; and, widespread consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2005. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

Netflix, Inc.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

	Three Months Ended									Six Months Ended
	June 30, 2004			March 31, 2005			June 30, 2005			June 30, 2004			June 30, 2005
Revenues:
Subscription	$	119,710		$	152,446		$	164,027		$	219,533		$	316,473
Sales		611			1,694			470			1,158			2,164
Total revenues		120,321			154,140			164,497			220,691			318,637
Cost of revenues:
Subscription		69,604			93,986			99,957			126,048			193,943
Sales		184			999			354			367			1,353
Total cost of revenues		69,788			94,985			100,311			126,415			195,296
Gross profit		50,533			59,155			64,186			94,276			123,341
Operating expenses:
Fulfillment		14,373			16,694			17,560			25,163			34,254
Technology and development		5,652			7,155			7,513			10,691			14,668
Marketing		20,477			35,803			26,338			47,170			62,141
General and administrative		3,280			5,007			4,898			6,416			9,905
Stock-based compensation		4,134			4,279			3,423			8,569			7,702
Total operating expenses		47,916			68,938			59,732			98,009			128,670
Operating income (loss)		2,617			(9,783	)		4,454			(3,733	)		(5,329	)
Other income (expense):
Interest and other income		304			1,051			1,246			895			2,297
Interest and other expense		(30	)		(38	)		(3	)		(61	)		(41	)
Income (loss) before income taxes		2,891			(8,770	)		5,697			(2,899	)		(3,073	)
Provision for income taxes		—			44			13			—			57
Net income (loss)	$	2,891		$	(8,814	)	$	5,684		$	(2,899	)	$	(3,130	)
Net income (loss) per share:
Basic	$	.06		$	(.17	)	$	.11		$	(.06	)	$	(.06	)
Diluted	$	.04		$	(.17	)	$	.09		$	(.06	)	$	(.06	)
Weighted average common shares outstanding:
Basic		51,898			52,816			53,190			51,590			53,005
Diluted		64,975			52,816			64,592			51,590			53,005
Reconciliation of Non-GAAP Financial Measures (Unaudited)
Non-GAAP net income reconciliation:
Net income (loss)	$	2,891		$	(8,814	)	$	5,684		$	(2,899	)	$	(3,130	)
Add back:
Stock-based compensation		4,134			4,279			3,423			8,569			7,702
Non-GAAP net income (loss)	$	7,025		$	(4,535	)	$	9,107		$	5,670		$	4,572
Non-GAAP net income (loss) per share:
Basic	$	.14		$	(.09	)	$	.17		$	.11		$	.09
Diluted	$	.11		$	(.09	)	$	.14		$	.09		$	.07
Weighted average common shares outstanding:
Basic		51,898			52,816			53,190			51,590			53,005
Diluted		64,975			52,816			64,592			64,907			64,122

Netflix, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)

	As of
	December 31, 2004			June 30, 2005
Assets
Current assets:
Cash and cash equivalents	$	174,461		$	170,972
Prepaid expenses		2,741			4,349
Prepaid revenue sharing expenses		4,695			4,567
Other current assets		5,449			2,517
Total current assets		187,346			182,405
DVD library, net		42,158			56,031
Intangible assets, net		961			127
Property and equipment, net		18,728			27,410
Deposits		1,600			1,552
Other assets		1,000			1,203
Total assets	$	251,793		$	268,728
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	49,775		$	56,211
Accrued expenses		13,131			13,702
Deferred revenue		31,936			33,497
Current portion of capital lease obligations		68			—
Total current liabilities		94,910			103,410
Deferred rent		600			785
Total liabilities		95,510			104,195
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 2004 and June 30, 2005; 52,732,025 and 53,426,304 issued and outstanding at December 31, 2004 and June 30, 2005, respectively		53			53
Additional paid-in capital		292,843			301,669
Deferred stock-based compensation		(4,693	)		(2,139	)
Accumulated other comprehensive loss		(222	)		(222	)
Accumulated deficit		(131,698	)		(134,828	)
Total stockholders’ equity		156,283			164,533
Total liabilities and stockholders’ equity	$	251,793		$	268,728

Netflix, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Three Months Ended									Six Months Ended
	June 30, 2004			March 31, 2005			June 30, 2005			June 30, 2004			June 30, 2005
Cash flows from operating activities:
Net income (loss)	$	2,891		$	(8,814	)	$	5,684		$	(2,899	)	$	(3,130	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of property and equipment		1,323			1,938			2,156			2,575			4,094
Amortization of DVD library		21,141			22,006			25,552			39,268			47,558
Amortization of intangible assets		454			454			380			1,080			834
Stock-based compensation expense		4,134			4,279			3,423			8,569			7,702
Loss on disposal of short-term investments		274			—			—			274			—
Gain on disposal of DVDs		(427	)		(1,129	)		(208	)		(791	)		(1,337	)
Non-cash interest expense		11			11			—			22			11
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(2,521	)		4,671			(3,219	)		(1,522	)		1,452
Accounts payable		(631	)		2,857			3,579			9,898			6,436
Accrued expenses		1,391			2,550			(1,979	)		2,227			571
Deferred revenue		3,755			527			1,034			6,927			1,561
Deferred rent		171			93			92			138			185
Net cash provided by operating activities		31,966			29,443			36,494			65,766			65,937
Cash flows from investing activities:
Purchases of short-term investments		(222	)		—			—			(586	)		—
Proceeds from sale of short-term investments		45,013			—			—			45,013			—
Purchases of property and equipment		(2,048	)		(6,845	)		(5,931	)		(3,856	)		(12,776	)
Acquisitions of DVD library		(24,083	)		(33,040	)		(29,218	)		(47,653	)		(62,258	)
Proceeds from sale of DVDs		611			1,694			470			1,158			2,164
Deposits and other assets		(168	)		(177	)		22			(187	)		(155	)
Net cash provided by (used in) investing activities		19,103			(38,368	)		(34,657	)		(6,111	)		(73,025	)
Cash flows from financing activities:
Proceeds from issuance of common stock		2,305			365			3,313			4,124			3,678
Principal payments on notes payable and capital lease obligations		(118	)		(79	)		—			(229	)		(79	)
Net cash provided by financing activities		2,187			286			3,313			3,895			3,599
Net increase (decrease) in cash and cash equivalents		53,256			(8,639	)		5,150			63,550			(3,489	)
Cash and cash equivalents, beginning of period		100,188			174,461			165,822			89,894			174,461
Cash and cash equivalents, end of period	$	153,444		$	165,822		$	170,972		$	153,444		$	170,972
Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities	$	31,966		$	29,443		$	36,494		$	65,766		$	65,937
Purchases of property and equipment		(2,048	)		(6,845	)		(5,931	)		(3,856	)		(12,776	)
Acquisitions of DVD library		(24,083	)		(33,040	)		(29,218	)		(47,653	)		(62,258	)
Proceeds from sale of DVDs		611			1,694			470			1,158			2,164
Deposits and other assets		(168	)		(177	)		22			(187	)		(155	)
Non-GAAP free cash flow	$	6,278		$	(8,925	)	$	1,837		$	15,228		$	(7,088	)

Netflix, Inc.

Consolidated Other data

(unaudited)

(in thousands, except percentages and subscriber acquisition cost)

	As of / Three Months Ended									As of / Six Months Ended
	June 30, 2004			March 31, 2005			June 30, 2005			June 30, 2004			June 30, 2005
Subscriber information:
Subscribers: beginning of period		1,932			2,610			3,018			1,487			2,610
Gross subscribers additions: during period		583			945			707			1,343			1,652
Gross subscriber additions year-to-year change		78.3	%		24.3	%		21.3	%		80.5	%		23.0	%
Gross subscriber additions quarter-to-quarter sequential change		(23.3	)%		20.7	%		(25.2	)%		—			—
Less subscriber cancellations : during period		(422	)		(537	)		(529	)		(737	)		(1,066	)
Subscribers: end of period		2,093			3,018			3,196			2,093			3,196
Subscribers year-to-year change		82.5	%		56.2	%		52.7	%		82.5	%		52.7	%
Subscribers quarter-to-quarter sequential change		8.3	%		15.6	%		5.9	%		—			—
Free subscribers: end of period		69			131			87			69			87
Free subscribers as percentage of ending subscribers		3.3	%		4.3	%		2.7	%		3.3	%		2.7	%
Paid subscribers: end of period		2,024			2,887			3,109			2,024			3,109
Paid subscribers year-to-year change		83.8	%		56.7	%		53.6	%		83.8	%		53.6	%
Paid subscribers quarter-to-quarter sequential change		9.9	%		16.1	%		7.7	%		—			—
Churn		5.6	%		5.0	%		4.7	%		—			—
Subscriber acquisition cost - Consolidated	$	35.12		$	37.89		$	37.25		$	35.12		$	37.62
Margins:
Gross margin		42.0	%		38.4	%		39.0	%		42.7	%		38.7	%
Operating margin		2.2	%		(6.3	)%		2.7	%		(1.7	)%		(1.7	)%
Net margin		2.4	%		(5.7	)%		3.5	%		(1.3	)%		(1.0	)%
Expenses as percentage of revenues:
Fulfillment		11.9	%		10.8	%		10.7	%		11.4	%		10.8	%
Technology and development		4.7	%		4.6	%		4.6	%		4.8	%		4.6	%
Marketing		17.0	%		23.2	%		16.0	%		21.4	%		19.5	%
General and administrative		2.7	%		3.2	%		3.0	%		2.9	%		3.1	%
Operating expenses before stock-based compensation		36.3	%		41.8	%		34.3	%		40.5	%		38.0	%
Stock-based compensation		3.5	%		2.9	%		2.0	%		3.9	%		2.4	%
Total operating expenses		39.8	%		44.7	%		36.3	%		44.4	%		40.4	%
Year-to-year change:
Total revenues		90.4	%		53.6	%		36.7	%		85.7	%		44.4	%
Fulfillment		99.0	%		54.7	%		22.2	%		85.0	%		36.1	%
Technology and development		37.1	%		42.0	%		32.9	%		28.7	%		37.2	%
Marketing		105.7	%		34.1	%		28.6	%		103.6	%		31.7	%
General and administrative		56.7	%		59.7	%		49.3	%		47.8	%		54.4	%
Operating expenses before stock-based compensation		87.2	%		41.6	%		28.6	%		81.0	%		35.3	%
Stock-based compensation		142.6	%		(3.5	)%		(17.2	)%		108.5	%		(10.1	)%
Total operating expenses		90.9	%		37.6	%		24.7	%		83.1	%		31.3	%