| Document and Entity Information | |
| 3 Months Ended
Mar. 31, 2010 | |
| Document Type | 10-Q |
| Amendment Flag | false |
| Document Period End Date | 2010-03-31 |
| Document Fiscal Year Focus | 2,010 |
| Document Fiscal Period Focus | Q1 |
| Trading Symbol | NFLX |
| Entity Registrant Name | NETFLIX INC |
| Entity Central Index Key | 0001065280 |
| Current Fiscal Year End Date | --12-31 |
| Entity Filer Category | Large Accelerated Filer |
| Entity Common Stock, Shares Outstanding | 52,261,855 |
| Condensed Consolidated Statements of Operations (USD $) | |||||||||||||||||||
| In Thousands, except Per Share data | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 | |||||||||||||||||
| Revenues | $493,665 | $394,098 | |||||||||||||||||
| Cost of revenues: | |||||||||||||||||||
| Subscription | 259,560 | 217,456 | |||||||||||||||||
| Fulfillment expenses | 47,602 | [1] | 41,812 | [1] | |||||||||||||||
| Total cost of revenues | 307,162 | 259,268 | |||||||||||||||||
| Gross profit | 186,503 | 134,830 | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||
| Technology and development | 37,399 | [1] | 24,200 | [1] | |||||||||||||||
| Marketing | 75,219 | [1] | 62,242 | [1] | |||||||||||||||
| General and administrative | 17,193 | [1] | 13,014 | [1] | |||||||||||||||
| Gain on disposal of DVDs | (1,653) | (1,097) | |||||||||||||||||
| Total operating expenses | 128,158 | 98,359 | |||||||||||||||||
| Operating income | 58,345 | 36,471 | |||||||||||||||||
| Other income (expense): | |||||||||||||||||||
| Interest expense | (4,959) | (670) | |||||||||||||||||
| Interest and other income | 972 | 1,610 | |||||||||||||||||
| Income before income taxes | 54,358 | 37,411 | |||||||||||||||||
| Provision for income taxes | 22,086 | 15,048 | |||||||||||||||||
| Net income | $32,272 | $22,363 | |||||||||||||||||
| Net income per share: | |||||||||||||||||||
| Basic | 0.61 | 0.38 | |||||||||||||||||
| Diluted | 0.59 | 0.37 | |||||||||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||||
| Basic | 52,911 | 58,734 | |||||||||||||||||
| Diluted | 54,775 | 60,709 | |||||||||||||||||
| [1] Stock-based compensation included in expense line items: Fulfillment expenses $ 176 $ 120 Technology and development 1,869 1,071 Marketing 643 443 General and administrative 2,814 1,498 | |||||||||||||||||||
| Condensed Consolidated Statements of Operations (Parenthetical) (USD $) | ||
| In Thousands | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
| Stock-based compensation, Fulfillment expenses | $176 | $120 |
| Stock-based compensation, Technology and development | 1,869 | 1,071 |
| Stock-based compensation, Marketing | 643 | 443 |
| Stock-based compensation, General and administrative | $2,814 | $1,498 |
| Condensed Consolidated Balance Sheets (USD $) | ||
| In Thousands | 3 Months Ended
Mar. 31, 2010 | 12 Months Ended
Dec. 31, 2009 |
| Current assets: | ||
| Cash and cash equivalents | $79,861 | $134,224 |
| Short-term investments | 186,469 | 186,018 |
| Current content library, net | 55,566 | 37,329 |
| Prepaid content | 31,704 | 26,741 |
| Prepaid and other current assets | 25,938 | 26,701 |
| Total current assets | 379,538 | 411,013 |
| Content library, net | 109,431 | 108,810 |
| Property and equipment, net | 127,165 | 131,653 |
| Deferred tax assets | 18,791 | 15,958 |
| Other non-current assets | 13,368 | 12,300 |
| Total assets | 648,293 | 679,734 |
| Current liabilities: | ||
| Accounts payable | 102,703 | 91,475 |
| Accrued expenses | 38,718 | 33,387 |
| Current portion of lease financing obligations | 1,917 | 1,410 |
| Deferred revenue | 100,109 | 100,097 |
| Total current liabilities | 243,447 | 226,369 |
| Long-term debt | 200,000 | 200,000 |
| Lease financing obligations, excluding current portion | 35,704 | 36,572 |
| Other non-current liabilities | 22,407 | 17,650 |
| Total liabilities | 501,558 | 480,591 |
| Commitments and contingencies | ||
| Stockholders' equity: | ||
| Common stock, $0.001 par value; 160,000,000 shares authorized at March 31, 2010 and December 31, 2009; 52,261,855 and 53,440,073 issued and outstanding at March 31, 2010 and December 31, 2009, respectively | 52 | 53 |
| Accumulated other comprehensive income, net | 487 | 273 |
| Retained earnings | 146,196 | 198,817 |
| Total stockholders' equity | 146,735 | 199,143 |
| Total liabilities and stockholders' equity | $648,293 | $679,734 |
| Condensed Consolidated Balance Sheets (Parenthetical) (USD $) | ||
| Mar. 31, 2010
| Dec. 31, 2009
| |
| Common stock, par value | 0.001 | 0.001 |
| Common stock, shares authorized | 160,000,000 | 160,000,000 |
| Common stock, issued and outstanding | 52,261,855 | 53,440,073 |
| Condensed Consolidated Statements of Cash Flows (USD $) | ||
| In Thousands | 3 Months Ended
Mar. 31, 2010 | 3 Months Ended
Mar. 31, 2009 |
| Cash flows from operating activities: | ||
| Net income | $32,272 | $22,363 |
| Adjustments to reconcile net income to net cash provided by operating activities: | ||
| Depreciation and amortization of property, equipment, and intangibles | 10,859 | 9,175 |
| Amortization of content library | 62,292 | 49,304 |
| Amortization of discounts and premiums on investments | 234 | 194 |
| Amortization of debt issuance costs | 98 | |
| Stock-based compensation expense | 5,502 | 3,132 |
| Excess tax benefits from stock-based compensation | (7,424) | (3,684) |
| Loss on disposal of property and equipment | 144 | |
| Gain on sale of short-term investments | (264) | (572) |
| Gain on disposal of DVDs | (3,228) | (2,033) |
| Deferred taxes | (2,761) | (1,344) |
| Changes in operating assets and liabilities: | ||
| Prepaid content and other current assets | (4,415) | (391) |
| Content library | (50,475) | (22,091) |
| Accounts payable | 16,878 | 8,572 |
| Accrued expenses | 11,953 | 2,945 |
| Deferred revenue | 12 | (2,504) |
| Other assets and liabilities | 3,879 | 2,423 |
| Net cash provided by operating activities | 75,412 | 65,633 |
| Cash flows from investing activities: | ||
| Purchases of short-term investments | (34,202) | (52,384) |
| Proceeds from sale of short-term investments | 30,770 | 36,933 |
| Proceeds from maturities of short-term investments | 4,013 | 1,330 |
| Purchases of property and equipment | (6,393) | (6,572) |
| Acquisitions of intangible asset | (130) | (200) |
| Acquisitions of content library | (36,902) | (46,499) |
| Proceeds from sale of DVDs | 3,984 | 2,726 |
| Other assets | (172) | (2) |
| Net cash used in investing activities | (39,032) | (64,668) |
| Cash flows from financing activities: | ||
| Principal payments of lease financing obligations | (361) | (269) |
| Proceeds from issuance of common stock | 9,918 | 13,589 |
| Excess tax benefits from stock-based compensation | 7,424 | 3,684 |
| Repurchases of common stock | (107,724) | (42,719) |
| Net cash used in financing activities | (90,743) | (25,715) |
| Net decrease in cash and cash equivalents | (54,363) | (24,750) |
| Cash and cash equivalents, beginning of period | 134,224 | 139,881 |
| Cash and cash equivalents, end of period | $79,861 | $115,131 |
| Basis of Presentation and Summary of Significant Accounting Policies | |
| 3 Months Ended
Mar. 31, 2010 | |
| Basis of Presentation and Summary of Significant Accounting Policies | 1. Basis of Presentation and Summary of Significant Accounting Policies The accompanying condensed consolidated interim financial statements of Netflix, Inc. and its wholly owned subsidiary (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 Companys Annual Report on Form 10-K for the year ended December31, 2009. 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 include the estimates of useful lives and residual value of the Companys content library, the valuation of stock-based compensation, the recognition and measurement of income tax assets and liabilities and royalties that may be due to performing rights organizations. The actual results experienced by the Company may differ from managements 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 Companys Annual Report on Form 10-K for the year ended December31, 2009 filed with the Securities and Exchange Commission (the SEC) on February22, 2010. Interim results are not necessarily indicative of the results for a full year. Certain prior period amounts have been reclassified to conform to current period presentation. Specifically, all prepayments related to content acquisition and licensing including those previously included in prepaid revenue sharing expenses and in other current assets have been reclassified to prepaid content. The remaining balance of other current assets has also been reclassified to be presented in combination with prepaid expenses. There have been no material changes in the Companys significant accounting policies as compared to the significant accounting policies described in the Companys Annual Report on Form10-K for the year ended December31, 2009 Recent Accounting Pronouncements There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March31, 2010, as compared to the recent accounting pronouncements described in the Companys Annual Report on Form 10-K, that are of significance, or potential significance to the Company. |
| Net Income Per Share | |
| 3 Months Ended
Mar. 31, 2010 | |
| Net Income Per Share | 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 primarily of incremental shares issuable upon the assumed exercise of stock options and shares currently purchasable pursuant to the Companys employee stock purchase plan using the treasury stock method. The computation of net income per share is as follows: Three months ended March31, 2010 March31, 2009 (inthousands,exceptpersharedata) Basic earnings per share: Net income $ 32,272 $ 22,363 Shares used in computation: Weighted-average common shares outstanding 52,911 58,734 Basic earnings per share $ 0.61 $ 0.38 Diluted earnings per share: Net income $ 32,272 $ 22,363 Shares used in computation: Weighted-average common shares outstanding 52,911 58,734 Employee stock options and employee stock purchase plan shares 1,864 1,975 Weighted-average number of shares 54,775 60,709 Diluted earnings per share $ 0.59 $ 0.37 Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation: Three months ended March31, 2010 March31, 2009 (in thousands) Employee stock options 22 85 |
| Short-Term Investments and Fair Value Measurement | |
| 3 Months Ended
Mar. 31, 2010 | |
| Short-Term Investments and Fair Value Measurement | 3. Short-Term Investments and Fair Value Measurement The Companys 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 Companys 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: March31, 2010 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated FairValue (in thousands) Corporate debt securities $ 105,614 $ 891 $ (82 ) $ 106,423 Government and agency securities 75,337 71 (88 ) 75,320 Asset and mortgage backed securities 4,763 158 (195 ) 4,726 $ 185,714 $ 1,120 $ (365 ) $ 186,469 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 The following tables show the gross unrealized losses and fair value of the Companys investments in an unrealized loss position, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: As of March31, 2010 Less Than 12 Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) Corporate debt securities $ 36,015 $ (82 ) $ $ $ 36,015 $ (82 ) Government and agency securities 16,387 (88 ) 16,387 (88 ) Asset and mortgage backed securities 255 (3 ) 783 (192 ) 1,038 (195 ) $ 52,657 $ (173 ) $ 783 $ (192 ) $ 53,440 $ (365 ) As of December31, 2009 Less Than 12 Months 12 Months or Greater Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses (in thousands) Corporate debt securities $ 25,982 $ (106 ) $ $ $ 25,982 $ (106 ) Government and agency securities 85,391 (414 ) 3,279 (2 ) 88,670 (416 ) Asset and mortgage backed securities 280 (1 ) 768 (211 ) 1,048 (212 ) $ 111,653 $ (521 ) $ 4,047 $ ( |
| Long-term Debt | |
| 3 Months Ended
Mar. 31, 2010 | |
| Long-term Debt | 4. Long-term Debt As of March31, 2010, 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 November15, 2017 (the Notes). Interest on the Notes is payable semi-annually at a rate of 8.50%per annum on May15 and November15 of each year, commencing on May15, 2010. The 8.50% Notes include, among other terms and conditions, limitations on the Companys 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 or make distributions (each subject to specified exceptions). At March31, 2010 and December31, 2009, the Company was in compliance with these covenants. Based on quoted market prices, the fair value of the 8.50% Notes as of March31, 2010 and December31, 2009 was approximately $210.0 million and $207.5 million, respectively. |
| Balance Sheet Components | |
| 3 Months Ended
Mar. 31, 2010 | |
| Balance Sheet Components | 5. Balance Sheet Components Content Library, Net Content library and accumulated amortization are as follows: As of March31, 2010 December31, 2009 (in thousands) Content library, gross $ 764,436 $ 742,802 Less: Accumulated amortization (599,439 ) (596,663 ) 164,997 146,139 Less: Current content library, net 55,566 37,329 Content library, net $ 109,431 $ 108,810 Property and Equipment, Net Property and equipment and accumulated depreciation are as follows: As of Useful Life March31, 2010 December31, 2009 (in thousands) Computer equipment 3years $ 65,056 $ 62,132 Other equipment 5years 65,108 65,059 Computer software, including internal-use software 3 years 37,454 35,401 Furniture and fixtures 3 years 12,436 12,421 Building 30 years 40,681 40,681 Leasehold improvements Overlifeoflease 35,340 35,156 Capital work-in-progress 14,902 15,097 Property and equipment, gross 270,977 265,947 Less: Accumulated depreciation (143,812 ) (134,294 ) Property and equipment, net $ 127,165 $ 131,653 |
| Other Comprehensive Income | |
| 3 Months Ended
Mar. 31, 2010 | |
| Other Comprehensive Income | 6. Other Comprehensive Income Other comprehensive income consists of unrealized gains and losses on available-for-sale securities, net of tax. The components of comprehensive income are as follows: Three months ended March31, 2010 March31, 2009 (in thousands) Net income $ 32,272 $ 22,363 Other comprehensive income: Change in unrealized gain (loss) on available-for-sale securities, net of tax 214 (531 ) Comprehensive income $ 32,486 $ 21,832 |
| Stockholders' Equity | |
| 3 Months Ended
Mar. 31, 2010 | |
| Stockholders' Equity | 7. Stockholders Equity Stock Repurchases On August6, 2009, 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 2010. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. During the three months ended March31, 2010, under this program, the Company repurchased 1,670,000 shares of common stock at an average price of approximately $65 per share for an aggregate amount of approximately $108 million. Shares repurchased under this program have been retired. Shares repurchased by the Company are accounted for when the transaction is settled. There were no unsettled share repurchases at March31, 2010. 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. In the first quarter of 2010, $84.9 million was deducted from retained earnings related to share repurchases. Stock-Based Compensation A summary of option activity during the three months ended March31, 2010 is as follows: Options Outstanding Weighted-Average Remaining Contractual Term (in Years) Aggregate IntrinsicValue (inThousands) SharesAvailable for Grant Number of Shares Weighted-Average Exercise Price Balances as of December31, 2009 2,591,267 4,241,438 $ 22.74 Granted (191,127 ) 191,127 61.95 Exercised (491,782 ) 20.17 Balances as of March31, 2010 2,400,140 3,940,783 24.97 6.11 $ 192,200 VestedandexercisableatMarch 31, 2010 3,940,783 24.97 6.11 $ 192,200 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the Companys closing stock price on the last trading day of the first quarter of 2010 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 March31, 2010. This amount changes based on the fair market value of the Companys common stock. Total intrinsic value of options exercised for the three months ended March31, 2010 and 2009 was $22.8 million and $16.4 million, respectively. Cash received from option exercises for the three months ended March31, 2010 and 2009 was $9.9million and $13.6 million, respectively. The following table summarizes the assumptions used to value option grants using the lattice-binomial model: Three Months Ended March31, 2010 March31, 2009 Dividend yield 0% 0% Expected volatility 46% 56% Risk-free interest rate 3.67% 2.60% |
| Income Taxes | |
| 3 Months Ended
Mar. 31, 2010 | |
| Income Taxes | 8. Income Taxes The effective tax rate for the three months ended March31, 2010 and 2009 is 40.6% and 40.2%, respectively. As of December31, 2009, the Company had $13.2 million of gross unrecognized tax benefits. During the three months ended March31, 2010, the Company had an increase in gross unrecognized tax benefits of approximately $0.3 million. The gross uncertain tax positions, if recognized by the Company, will result in a reduction of approximately $10.9 million to the tax provision thereby favorably impacting the Companys effective tax rate. The Company does not believe it is reasonably possible that its unrecognized tax benefits would significantly change over the next twelve months. Accordingly, the Companys unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheet. The Company includes interest and penalties related to unrecognized tax benefits within the provision for income tax expense. 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 and state income tax examinations for years after 1996. |
| Commitments and Contingencies | |
| 3 Months Ended
Mar. 31, 2010 | |
| Commitments and Contingencies | 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 Companys involvement in the construction funding of the buildings, the Company is the deemed owner (for accounting purposes only) of these buildings in accordance with ASC topic 840.40 LeasesSale-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, 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 building is depreciated over a 30 year useful life. The monthly rent payments made to the lessor under the lease agreements are recorded in the Companys 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 as of March31, 2010 to $26.8 million.The leases will 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 asset 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. The Company had $179.1 million and $114.8 million of commitments at March31, 2010 and December31, 2009, respectively, related to streaming content license agreements commitments that do not meet asset recognition criteria. The Company is currently involved in negotiations with performing rights organizations (PROs) that hold the rights to music used in connection with streaming content. The Company accrues for estimated royalties that may be due to PROs. The outcome of these negotiations is uncertain. Additionally, pending litigation between certain PROs and other third parties could impact our negotiations.If we are 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 managements estimates. Litigation From time to time, in the normal co |
