Netflix (NFLX) 8-K Netflix Announces Q3 2005 Financial Results

Exhibit 99.1

FOR IMMEDIATE RELEASE	IR CONTACT:	Deborah Crawford
Wednesday, October 19, 2005		Director of Investor Relations
		408 317-3712
	PR CONTACT:	Ken Ross
		VP, Corporate Communications
		408 317-3931

Netflix Announces Q3 2005 Financial Results

Subscribers - 3.6 million

Churn - 4.3%

GAAP Net Income - $6.9 million

Non-GAAP Net Income Before Net Settlement Expense - $13.4 million

Los Gatos, Calif. – October 19, 2005 – Netflix (Nasdaq: NFLX) today reported results for the third quarter ended September 30, 2005.

For the third quarter:

• Revenue was $174.3 million.

• GAAP net income was $6.9 million. Before net settlement expense, net income was $10.1 million.

• Non-GAAP net income was $10.2 million. Non-GAAP net income before net settlement expense was $13.4 million.

• Subscribers increased 61 percent year-over-year to 3.592 million.

• Churn declined to a record low of 4.3 percent.

“The third quarter provided a good view of the power and potential of the Netflix model, coupling strong subscriber growth with the cost benefits of our increasing scale,” said Reed Hastings, Netflix co-founder and chief executive officer. “Combining the best customer experience with the lowest costs is a powerful formula for success, and we expect that formula to deliver increasingly impressive results in the balance of 2005 and in 2006.”

Third-Quarter 2005 Financial Highlights

Revenue for the third quarter of 2005 was a record $174.3 million, representing 23 percent year-over-year growth from $141.6 million for the third quarter of 2004, and 6 percent quarter-over-quarter growth from $164.5 million for the second quarter of 2005.

GAAP net income for the third quarter of 2005 was $6.9 million, or $0.11 per diluted share, compared to GAAP net income of $18.9 million, or $0.29 per diluted share, for the third quarter of 2004 and GAAP net income of $5.7 million, or $0.09 per diluted share, for the second quarter of 2005. Management had guided to GAAP net income of $2.5 million to $5.3 million.

GAAP net income included the impact of a net settlement expense in the quarter related to a previously announced lawsuit settlement of $3.2 million. The settlement remains subject to court approval. Excluding the net settlement expense, net income was $10.1 million, or $0.15 per diluted share. Management had guided to net income excluding the net settlement expense of $6.5 million to $8.3 million.

Non-GAAP net income was $10.2 million, or $0.16 per diluted share, for the third quarter of 2005, compared to non-GAAP net income of $22.6 million, or $0.35 per diluted share, for the third quarter of 2004 and non-GAAP net income of $9.1 million, or $0.14 per diluted share, for the second quarter of 2005. Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense. Excluding the net settlement expense in the quarter related to a previously announced lawsuit settlement, non-GAAP net income was $13.4 million, or $0.20 per diluted share.

Gross margin for the third quarter of 2005 was 43.2 percent compared to 49.5 percent for the third quarter of 2004 and 39.0 percent for the second quarter of 2005.

Free cash flow¹ for the third quarter of 2005 was $7.5 million, compared to $14.1 million in the third quarter of 2004 and $1.8 million for the second quarter of 2005.

Cash provided by operating activities for the third quarter of 2005 was $33.3 million, compared to $49.3 million for the third quarter of 2004 and $36.5 million for the second quarter of 2005.

Subscriber acquisition cost² for the third quarter of 2005 was $35.69 per gross subscriber addition, compared to $36.97³ for the same period of 2004 and $37.25 for the second quarter of 2005.

Churn⁴ for the third quarter of 2005 was 4.3 percent, compared to 5.6 percent for the third quarter of 2004 and 4.7 percent for the second 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 third quarter of 2005 with approximately 3,592,000 total subscribers, representing 61 percent year-over-year growth from 2,229,000 total subscribers at the end of the third quarter of 2004 and 12 percent sequential growth from 3,196,000 subscribers at the end of the second quarter of 2005. Net subscriber additions in the quarter were 396,000, compared to 136,000 for the same period of 2004 and 178,000 for the second quarter of 2005.

During the quarter Netflix acquired 921,000 gross subscriber additions, representing 56 percent year-over-year growth from 590,000 gross subscriber additions acquired in the third quarter of 2004 and 30 percent quarter-over-quarter growth from 707,000 gross subscriber additions acquired in the second quarter of 2005.

Of the 3,592,000 total subscribers at quarter end, 95 percent, or 3,423,000, were paid subscribers. The other 5 percent, or 169,000, were free subscribers. Paid subscribers represented 96 percent of total subscribers at the end of the third quarter of 2004 and 97 percent of total subscribers at the end of the second quarter of 2005.

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 SAC in the third quarter of 2004 excludes costs associated with international operations. Consolidated SAC was $38.18 for the third quarter of 2004.

⁴ Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months.

Business Outlook

The Company’s performance expectations for the fourth quarter of 2005 and the full year of 2006 are as follows:

Revised Fourth-Quarter 2005

• Ending subscribers of 4.0 million to 4.2 million from 3.85 million to 4.05 million

• Revenue of $191 million to $196 million from $187 million to $193 million

• GAAP net income of $4.0 million to $7.5 million from $1.0 million to $6.0 million

Full-Year 2006

• Ending subscribers of at least 5.65 million

• Revenue of at least $940 million

• Pretax income of $50 million to $60 million⁵

Float and Trading Plans

The Company estimates the public float at approximately 46,874,645 shares as of September 30, 2005, up 1 percent from 46,279,628 shares as of June 30, 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 6:00 p.m. Eastern Time / 3:00 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 6:00 p.m. Pacific Time on October 19, 2005 through October 25, 2005. To listen to a replay, call (719) 457-0820, access code 4417528.

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, and, where specified, excludes the net settlement expense related to a previously announced lawsuit settlement. 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

⁵ Pretax income is defined as income before income taxes as shown on the Company’s Statement of Operations, which line item includes stock based compensation expense.

delivered for free by the USPS from regional shipping centers located throughout the United States. Netflix can reach more than 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than 1 billion 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 fourth quarter of 2005 as well as subscriber growth, revenue and pre-tax income for the full-year 2006. 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, availability and effectiveness of our advertising; 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 regulatory changes and 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									Nine Months Ended
	September 30, 2004			June 30, 2005			September 30, 2005			September 30, 2004			September 30, 2005
Revenues:
Subscription	$	140,414		$	164,027		$	172,740		$	359,947		$	489,213
Sales		1,230			470			1,577			2,388			3,741
Total revenues		141,644			164,497			174,317			362,335			492,954
Cost of revenues:
Subscription		71,130			99,957			97,878			197,178			291,821
Sales		471			354			1,189			838			2,542
Total cost of revenues		71,601			100,311			99,067			198,016			294,363
Gross profit		70,043			64,186			75,250			164,319			198,591
Operating expenses:
Fulfillment		15,013			17,560			17,544			40,176			51,798
Technology and development		6,325			7,513			8,006			17,016			22,674
Marketing		22,525			26,338			32,867			69,695			95,008
General and administrative		4,122			4,898			8,020			10,538			17,925
Stock-based compensation		3,660			3,423			3,293			12,229			10,995
Total operating expenses		51,645			59,732			69,730			149,654			198,400
Operating income		18,398			4,454			5,520			14,665			191
Other income (expense):
Interest and other income		579			1,246			1,491			1,474			3,788
Interest and other expense		(52	)		(3	)		(13	)		(113	)		(54	)
Income before income taxes		18,925			5,697			6,998			16,026			3,925
Provision for income taxes		—			13			52			—			109
Net income	$	18,925		$	5,684		$	6,946		$	16,026		$	3,816
Net income per share:
Basic	$	.36		$	.11		$	.13		$	.31		$	.07
Diluted	$	.29		$	.09		$	.11		$	.25		$	.06
Weighted average common shares outstanding:
Basic		52,211			53,190			53,693			51,798			53,237
Diluted		64,449			64,592			66,012			64,797			64,928
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
Non-GAAP net income reconciliation:
Net income	$	18,925		$	5,684		$	6,946		$	16,026		$	3,816
Add back:
Stock-based compensation		3,660			3,423			3,293			12,229			10,995
Non-GAAP net income	$	22,585		$	9,107		$	10,239		$	28,255		$	14,811
Non-GAAP net income per share:
Basic	$	.43		$	.17		$	.19		$	.55		$	.28
Diluted	$	.35		$	.14		$	.16		$	.44		$	.23
Weighted average common shares outstanding:
Basic		52,211			53,190			53,693			51,798			53,237
Diluted		64,449			64,592			66,012			64,797			64,928

Netflix, Inc.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)

	As of
	December 31,			September 30,
	2004			2005
Assets
Current assets:
Cash and cash equivalents	$	174,461		$	181,886
Prepaid expenses		2,741			2,918
Prepaid revenue sharing expenses		4,695			3,710
Other current assets		5,449			3,404
Total current assets		187,346			191,918
DVD library, net		42,158			52,735
Intangible assets, net		961			469
Property and equipment, net		18,728			30,415
Deposits		1,600			1,568
Other assets		1,000			1,197
Total assets	$	251,793		$	278,302
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	49,775		$	43,951
Accrued expenses		13,131			20,404
Deferred revenue		31,936			34,400
Current portion of capital lease obligations		68			—
Total current liabilities		94,910			98,755
Deferred rent		600			875
Total liabilities		95,510			99,630
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at December 31, 2004 and September 30, 2005; 52,732,025 and 53,961,946 issued and outstanding at December 31, 2004 and September 30, 2005, respectively		53			54
Additional paid-in capital		292,843			308,123
Deferred stock-based compensation		(4,693	)		(1,401	)
Accumulated other comprehensive loss		(222	)		(222	)
Accumulated deficit		(131,698	)		(127,882	)
Total stockholders’ equity		156,283			178,672
Total liabilities and stockholders’ equity	$	251,793		$	278,302

Netflix, Inc.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

	Three Months Ended									Nine Months Ended
	September 30, 2004			June 30, 2005			September 30, 2005			September 30, 2004			September 30, 2005
Cash flows from operating activities:
Net income	$	18,925		$	5,684		$	6,946		$	16,026		$	3,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment		1,569			2,156			2,424			4,144			6,518
Amortization of DVD library		20,450			25,552			24,477			59,718			72,035
Amortization of intangible assets		453			380			139			1,533			973
Stock-based compensation expense		3,660			3,423			3,293			12,229			10,995
Stock option income tax benefits		—			—			12			—			12
Loss on disposal of short-term investments		—			—			—			274			—
Gain on disposal of DVDs		(941	)		(208	)		(819	)		(1,732	)		(2,156	)
Non-cash interest expense		11			—						33			11
Changes in operating assets and liabilities:														—
Prepaid expenses and other current assets		(3,478	)		(3,219	)		1,401			(5,000	)		2,853
Accounts payable		5,116			3,579			(12,260	)		15,014			(5,824	)
Accrued expenses		1,988			(1,979	)		6,702			4,215			7,273
Deferred revenue		1,407			1,034			903			8,334			2,464
Deferred rent		108			92			90			246			275
Net cash provided by operating activities		49,268			36,494			33,308			115,034			99,245
Cash flows from investing activities:
Purchases of short-term investments		—			—			—			(586	)		—
Proceeds from sale of short-term investments		—			—			—			45,013			—
Purchases of property and equipment		(4,165	)		(5,931	)		(5,429	)		(8,021	)		(18,205	)
Acquisition of intangible asset		—			—			(481	)		—			(481	)
Acquisitions of DVD library		(31,986	)		(29,218	)		(21,939	)		(79,639	)		(84,197	)
Proceeds from sale of DVDs		1,230			470			1,577			2,388			3,741
Deposits and other assets		(206	)		22			(10	)		(393	)		(165	)
Net cash used in investing activities		(35,127	)		(34,657	)		(26,282	)		(41,238	)		(99,307	)
Cash flows from financing activities:
Proceeds from issuance of common stock		373			3,313			3,888			4,497			7,566
Principal payments on notes payable and capital lease obligations		(100	)		—			—			(329	)		(79	)
Net cash provided by financing activities		273			3,313			3,888			4,168			7,487
Effect of exchange rate changes on cash and cash equivalents		(44	)		—			—			(44	)		—
Net increase in cash and cash equivalents		14,370			5,150			10,914			77,920			7,425
Cash and cash equivalents, beginning of period		153,444			165,822			170,972			89,894			174,461
Cash and cash equivalents, end of period	$	167,814		$	170,972		$	181,886		$	167,814		$	181,886
Non-GAAP free cash flow reconciliation:
Net cash provided by operating activities	$	49,268		$	36,494		$	33,308		$	115,034		$	99,245
Purchases of property and equipment		(4,165	)		(5,931	)		(5,429	)		(8,021	)		(18,205	)
Acquisitions of DVD library		(31,986	)		(29,218	)		(21,939	)		(79,639	)		(84,197	)
Proceeds from sale of DVDs		1,230			470			1,577			2,388			3,741
Deposits and other assets		(206	)		22			(10	)		(393	)		(165	)
Non-GAAP free cash flow	$	14,141		$	1,837		$	7,507		$	29,369		$	419

Netflix, Inc.

Consolidated Other data

(unaudited)

(in thousands, except percentages and subscriber acquisition cost)

	As of / Three Months Ended									As of / Nine Months Ended
	Sept 30, 2004			June 30, 2005			Sept 30, 2005			Sept 30, 2004			Sept 30, 2005
Subscriber information:
Subscribers: beginning of period		2,093			3,018			3,196			1,487			2,610
Gross subscribers additions: during period		590			707			921			1,933			2,573
Gross subscriber additions year-to-year change		54.0	%		21.3	%		56.1	%		71.5	%		33.1	%
Gross subscriber additions quarter-to-quarter sequential change		1.2	%		(25.2	%)		30.3	%		—			—
Less subscriber cancellations : during period		(454	)		(529	)		(525	)		(1,191	)		(1,591	)
Subscribers: end of period		2,229			3,196			3,592			2,229			3,592
Subscribers year-to-year change		72.7	%		52.7	%		61.1	%		72.7	%		61.1	%
Subscribers quarter-to-quarter sequential change		6.5	%		5.9	%		12.4	%		—			—
Free subscribers: end of period		94			87			169			94			169
Free subscribers as percentage of ending subscribers		4.2	%		2.7	%		4.7	%		4.2	%		4.7	%
Paid subscribers: end of period		2,135			3,109			3,423			2,135			3,423
Paid subscribers year-to-year change		71.9	%		53.6	%		60.3	%		71.9	%		60.3	%
Paid subscribers quarter-to-quarter sequential change		5.5	%		7.7	%		10.1	%		—			—
Churn		5.6	%		4.7	%		4.3	%		—			—
Subscriber acquisition cost - Consolidated	$	38.18		$	37.25		$	35.69		$	36.06		$	36.92
Subscriber acquisition cost - U.S.	$	36.97		$	37.25		$	35.69		$	35.69		$	36.92
Margins:
Gross margin		49.5	%		39.0	%		43.2	%		45.4	%		40.3	%
Operating margin		13.0	%		2.7	%		3.2	%		4.0	%		0.1	%
Net margin		13.4	%		3.5	%		4.0	%		4.4	%		0.8	%
Expenses as percentage of revenues:
Fulfillment		10.6	%		10.7	%		10.1	%		11.1	%		10.5	%
Technology and development		4.5	%		4.6	%		4.6	%		4.7	%		4.6	%
Marketing		15.9	%		16.0	%		18.9	%		19.2	%		19.3	%
General and administrative		2.9	%		3.0	%		4.6	%		2.9	%		3.6	%
Operating expenses before stock-based compensation		33.9	%		34.3	%		38.2	%		37.9	%		38.0	%
Stock-based compensation		2.6	%		2.0	%		1.8	%		3.4	%		2.2	%
Total operating expenses		36.5	%		36.3	%		40.0	%		41.3	%		40.2	%
Year-to-year change:
Total revenues		96.2	%		36.7	%		23.1	%		89.6	%		36.0	%
Fulfillment		80.4	%		22.2	%		16.9	%		83.2	%		28.9	%
Technology and development		33.5	%		32.9	%		26.6	%		30.5	%		33.3	%
Marketing		84.9	%		28.6	%		45.9	%		97.2	%		36.3	%
General and administrative		53.9	%		49.3	%		94.6	%		50.1	%		70.1	%
Operating expenses before stock-based compensation		71.9	%		28.6	%		38.5	%		77.7	%		36.4	%
Stock-based compensation		31.8	%		(17.2	)%		(10.0	)%		77.6	%		(10.1	)%
Total operating expenses		68.2	%		24.7	%		35.0	%		77.7	%		32.6	%