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Form 10-Q
Table of Contents

 

 

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

June 30, 2011 For the quarterly period ended June 30, 2011

OR

 

¨ 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.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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 June 30, 2011, there were 52,536,246 shares of the registrant’s common stock, par value $0.001, outstanding.

 

 

 

 


Table of Contents

Table of Contents

 

          Page  
   Part I. Financial Information   

Item 1.

   Consolidated Financial Statements   
  

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010

     3   
  

Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

     4   
  

Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2011 and 2010

     5   
  

Notes to Consolidated Financial Statements

     6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      15   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      28   

Item 4.

   Controls and Procedures      28   
   Part II. Other Information      30   

Item 1.

   Legal Proceedings      30   

Item 1A.

   Risk Factors      30   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      30   

Item 6.

   Exhibits      31   

Signatures

        32   

Exhibit Index

        33   

 

2


Table of Contents

NETFLIX, INC.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Revenues

   $ 788,610      $ 519,819      $ 1,507,163      $ 1,013,484   

Cost of revenues:

        

Subscription

     428,203        265,387        805,195        524,947   

Fulfillment expenses

     61,775        49,547        122,934        97,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     489,978        314,934        928,129        622,096   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     298,632        204,885        579,034        391,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Technology and development

     57,865        37,863        108,770        75,262   

Marketing

     94,983        74,533        199,242        149,752   

General and administrative

     30,670        15,147        53,668        30,687   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     183,518        127,543        361,680        255,701   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     115,114        77,342        217,354        135,687   

Other income (expense):

        

Interest expense

     (5,303     (4,893     (10,168 )     (9,852 )

Interest and other income

     1,013        921        1,878        1,893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     110,824        73,370        209,064        127,728   

Provision for income taxes

     42,610        29,851        80,617        51,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 68,214      $ 43,519      $ 128,447      $ 75,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 1.30      $ 0.83      $ 2.44      $ 1.44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.26      $ 0.80      $ 2.37      $ 1.39   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     52,470        52,486        52,614        52,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     53,909        54,324        54,077        54,548   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

NETFLIX, INC.

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and par value data)

 

     As of  
     June 30,
2011
     December 31,
2010
 

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 175,207       $ 194,499   

Short-term investments

     201,200         155,888   

Current content library, net

     499,434         181,006   

Prepaid content

     59,811         62,217   

Other current assets

     33,792         47,357   
                 

Total current assets

     969,444         640,967   

Content library, net

     425,246         180,973   

Property and equipment, net

     136,948         128,570   

Deferred tax assets

     25,883         17,467   

Other non-current assets

     13,172         14,090   
                 

Total assets

   $ 1,570,693       $ 982,067   
                 

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable

   $ 533,436       $ 222,824   

Accrued expenses

     44,137         36,489   

Current portion of lease financing obligations

     2,199         2,083   

Deferred revenue

     146,937         127,183   
                 

Total current liabilities

     726,709         388,579   

Long-term debt

     200,000         200,000   

Lease financing obligations, excluding current portion

     32,986         34,123   

Other non-current liabilities

     276,964         69,201   
                 

Total liabilities

     1,236,659         691,903   

Commitments and contingencies (Note 9)

     

Stockholders’ equity:

     

Common stock, $0.001 par value; 160,000,000 shares authorized at June 30, 2011 and December 31, 2010; 52,536,246 and 52,781,949 issued and outstanding at June 30, 2011 and December 31, 2010, respectively

     53         53   

Additional paid-in capital

     —           51,622   

Accumulated other comprehensive income, net

     884         750   

Retained earnings

     333,097         237,739   
                 

Total stockholders’ equity

     334,034         290,164   
                 

Total liabilities and stockholders’ equity

   $ 1,570,693       $ 982,067   
                 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NETFLIX, INC.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Cash flows from operating activities:

        

Net income

   $ 68,214      $ 43,519      $ 128,447      $ 75,791   

Adjustments to reconcile net income to net cash provided by operating activities:

        

Additions to streaming content library

     (612,595 )     (66,157 )     (804,902     (116,632 )

Change in streaming content liabilities

     419,832        18,308        501,900        29,559   

Amortization of streaming content library

     144,466        29,844        230,403        48,523   

Amortization of DVD content library

     24,000        35,299        50,990        78,912   

Depreciation and amortization of property, equipment and intangibles

     10,182        9,309        20,008        20,168   

Stock-based compensation expense

     15,536        6,928        27,800        12,430   

Excess tax benefits from stock-based compensation

     (17,868 )     (11,182 )     (33,522     (18,606 )

Other non-cash items

     (802 )     (2,900 )     (1,727     (6,060  )

Deferred taxes

     (3,927 )     (3,394 )     (8,909     (6,155 )

Changes in operating assets and liabilities:

        

Prepaid content

     14,787        (2,133 )     2,407        (7,096 )

Other current assets

     4,660        (9,211 )     13,744        (8,663 )

Other accounts payable

     (4,465 )     1,472        10,370        12,160   

Accrued expenses

     17,941        7,917        40,611        21,663   

Deferred revenue

     3,892        1,310        19,754        1,322   

Other non-current assets and liabilities

     2,539        1,323        5,341        141   
                                

Net cash provided by operating activities

     86,392        60,252        202,715        137,457   
                                

Cash flows from investing activities:

        

Acquisition of DVD content library

     (19,065 )     (24,191 )     (41,184     (61,093 )

Purchases of short-term investments

     (40,597 )     (21,795 )     (92,863     (57,790 )

Proceeds from sale of short-term investments

     16,510        32,055        31,471        62,825   

Proceeds from maturities of short-term investments

     15,985        4,310        16,635        8,323   

Purchases of property and equipment

     (8,626 )     (5,671 )     (24,946     (12,064 )

Other assets

     844        3,825        2,263        7,507   
                                

Net cash used in investing activities

     (34,949 )     (11,467 )     (108,624     (52,292 )
                                

Cash flows from financing activities:

        

Principal payments of lease financing obligations

     (520 )     (465 )     (1,021     (826 )

Proceeds from issuance of common stock

     7,418        13,109        14,180        23,027   

Excess tax benefits from stock-based compensation

     17,868        11,182        33,522        18,606   

Repurchases of common stock

     (51,421 )     (45,145 )     (160,064     (152,869 )
                                

Net cash used in financing activities

     (26,655 )     (21,319 )     (113,383     (112,062 )
                                

Net increase (decrease) in cash and cash equivalents

     24,788        27,466        (19,292     (26,897 )

Cash and cash equivalents, beginning of period

     150,419        79,861        194,499        134,224   
                                

Cash and cash equivalents, end of period

   $ 175,207      $ 107,327      $ 175,207      $ 107,327   
                                

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

NETFLIX, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying 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, 2010. The preparation of 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 consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the 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. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be 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, 2010 filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2011. Interim results are not necessarily indicative of the results for a full year.

The Company is organized into two operating segments: Domestic (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 total assets, total liabilities, 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, 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 for 2010, shares that were purchasable pursuant to the Company’s employee stock purchase plan (“ESPP”) using the treasury stock method. The computation of net income per share is as follows:

 

     Three months ended      Six months ended  
     June 30,
2011
     June 30,
2010
     June 30,
2011
     June 30,
2010
 
     (in thousands, except per share data)  

Basic earnings per share:

           

Net income

   $ 68,214       $ 43,519       $ 128,447       $ 75,791   

Shares used in computation:

           

Weighted-average common shares outstanding

     52,470         52,486         52,614         52,697   
                                   

Basic earnings per share

   $ 1.30       $ 0.83       $ 2.44       $ 1.44   
                                   

Diluted earnings per share:

           

Net income

   $ 68,214       $ 43,519       $ 128,447       $ 75,791   

Shares used in computation:

           

Weighted-average common shares outstanding

     52,470         52,486         52,614         52,697   

Employee stock options and employee stock purchase plan shares

     1,439         1,838         1,463         1,851   
                                   

Weighted-average number of shares

     53,909         54,324         54,077         54,548   
                                   

Diluted earnings per share

   $ 1.26       $ 0.80       $ 2.37       $ 1.39   
                                   

 

6


Table of Contents

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 number of options excluded 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. The following table summarizes, by major security type, our assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:

 

     June 30, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (in thousands)  

Cash

   $ 167,990       $ —         $ —        $ 167,990   

Level 1 securities (1):

          

Money market funds

     11,779         —           —          11,779   

Level 2 securities (3):

          

Corporate debt securities

     110,910         909         (34 )     111,785   

Government and agency securities

     87,699         653         (1 )     88,351   

Asset and mortgage-backed securities

     1,007         57         —          1,064   
                                  
   $ 379,385       $ 1,619       $ (35 )   $ 380,969   
                                  

Less: Long-term restricted cash (1)

             (4,562 )
                

Total cash, cash equivalents and short-term investments

           $ 376,407   
                

 

     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (in thousands)  

Cash

   $ 194,146       $ —         $ —        $ 194,146   

Level 1 securities (2):

          

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 (2)

             (4,561 )
                

Total cash, cash equivalents and short-term investments

           $ 350,387   
                

 

(1) Includes $7.2 million that is included in cash and cash equivalents and $4.6 million of long-term restricted cash that is included in other non-current assets as these funds represent restricted cash related to workers compensation deposits.
(2) Includes $0.4 million that is included in cash and cash equivalents and $4.6 million of long-term restricted cash that is included in other non-current assets as these funds represent restricted cash related to workers compensation deposits.
(3) Included in short-term investments.

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. 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 and cash equivalents 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 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.

 

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Table of Contents

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 June 30, 2011. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the three or six months ended June 30, 2011 and 2010. In addition, there were no material gross realized gains or losses in the three or six months ended June 30, 2011 and 2010.

The estimated fair value of short-term investments by contractual maturity as of June 30, 2011 is as follows:

 

     (in thousands)  

Due within one year

   $ 72,158   

Due after one year and through 5 years

     127,978   

Due after 5 years and through 10 years

     —     

Due after 10 years

     1,064   
  

 

 

 

Total short-term investments

   $ 201,200   
  

 

 

 

4. Long-term Debt

As of June 30, 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”). 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 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 June 30, 2011 and December 31, 2010, the Company was in compliance with these covenants.

Based on quoted market prices, the fair value of the Notes as of June 30, 2011 and December 31, 2010 was approximately $224.5 million and $225.0 million, respectively.

5. Balance Sheet Components

Content Library, Net

Content library and accumulated amortization are as follows:

 

     As of  
     June 30,
2011
    December 31,
2010
 
     (in thousands)  

Streaming content library, gross

   $ 1,150,331      $ 441,637   

DVD content library, gross

     608,977        627,392   
  

 

 

   

 

 

 

Content library, gross

     1,759,308        1,069,029   

Less: accumulated amortization

     (834,628     (707,050
  

 

 

   

 

 

 

Total content library, net

     924,680        361,979   

Less: Current content library, net

     499,434        181,006   
  

 

 

   

 

 

 

Content library, net

   $ 425,246      $ 180,973   
  

 

 

   

 

 

 

 

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Table of Contents

Property and Equipment, Net

Property and equipment and accumulated depreciation are as follows:

 

            As of  
            June 30,
2011
    December 31,
2010
 
     

 

(in thousands)

  

Computer equipment

     3 years       $ 63,153      $ 60,289   

Operations and other equipment

     5 years         100,259        72,368   

Software, including internal-use software

     3 years         29,474        26,961   

Furniture and fixtures

     3 years         13,189        11,438   

Building

     30 years         40,681        40,681   

Leasehold improvements

     Over life of lease         39,438        36,530   

Capital work-in-progress

        1,947        16,882   
                   

Property and equipment, gross

        288,141        265,149   

Less: accumulated depreciation

        (151,193 )     (136,579 )
                   

Property and equipment, net

      $ 136,948      $ 128,570   
                   

Accounts Payable and Other Non-Current Liabilities

Accounts payable consisted of the following:

 

     As of  
     June 30,
2011
     December 31,
2010
 
     (in thousands)   

Streaming content

   $ 435,751       $ 136,974   

Other

     97,685         85,850   
                 

Accounts payable

   $ 533,436       $ 222,824   
                 

Other non-current liabilities consisted of the following:

 

     As of  
     June 30,
2011
     December 31,
2010
 
     (in thousands)   

Streaming content

   $ 251,302       $ 48,179   

Other

     25,662         21,022   
                 

Other non-current liabilities

   $ 276,964       $ 69,201   
                 

The Company typically enters into multi-year licenses with studios and other distributors that may result in an increase in content library and a corresponding increase in accounts payable and other non-current liabilities. The payment terms for these license fees may extend over the term of the license agreement, which typically range from six months to five years. As of June 30, 2011, streaming content accounts payable and non-current streaming content liabilities increased $298.8 million and $203.1 million, respectively, as compared to December 31, 2010, due to the $804.9 million in additions to streaming content library.

6. Other Comprehensive Income

Comprehensive income was $68.5 million and $43.8 million for the three months ended June 30, 2011 and 2010, respectively. Comprehensive income was $128.6 million and $76.3 million for the six months ended June 30, 2011 and 2010, respectively. The primary difference between net income as reported and comprehensive income is unrealized gains and losses on available-for-sale securities, net of tax.

7. Stockholders’ Equity

Stock Repurchases

Under the current stock repurchase plan, announced on June 11, 2010, the Company is authorized to repurchase up to $300.0 million of its common stock through the end of 2012. During the three months ended June 30, 2011, the Company repurchased 216,000 shares at an average price of $238 per share for an aggregate amount of $51.4 million. As of June 30, 2011, $80.6 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.

 

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Shares repurchased by the Company are accounted for when the transaction is settled. As of June 30, 2011, there were no unsettled share repurchases. 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 the three and six months ended June 30, 2011, $10.2 million and $33.1 million, respectively, were deducted from retained earnings related to share repurchases.

Stock-Based Compensation

A summary of the activity related to the Company’s stock option plans during the six months ended June 30, 2011 is as follows:

 

           Options Outstanding                
     Shares
Available
for Grant
    Number of
Shares
    Weighted-Average
Exercise Price
     Weighted-Average
Remaining
Contractual Term
(in Years)
     Aggregate
Intrinsic Value
(in Thousands)
 

Balances as of December 31, 2010

     2,038,502        2,892,130      $ 36.11         

Granted

     (227,578 )     227,578        225.01         

Exercised

     —          (472,144 )     30.03         
                        

Balances as of June 30, 2011

     1,810,924        2,647,564        53.43         5.90       $ 554,194   
                        

Vested and exercisable at June 30, 2011

       2,647,564        53.43         5.90       $ 554,194   
                  

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 second quarter of 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 June 30, 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 June 30, 2011 and 2010 was $49.3 million and $33.1 million, respectively. Total intrinsic value of options exercised for the six months ended June 30, 2011 and 2010 was $93.4 million and $55.9 million, respectively.

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

 

     Three Months Ended    Six Months Ended
     June 30,
2011
   June 30,
2010
   June 30,
2011
   June 30,
2010

Dividend yield

   0%    0%    0%    0%

Expected volatility

   51%    52%    51%-52%    46%-52%

Risk-free interest rate

   3.35%    3.67%    3.35%-3.42%    3.67%

Suboptimal exercise factor

   2.22-3.54    1.97-2.30    2.17-3.54    1.78-2.30

In the first and second quarters of 2011, the Company used a suboptimal exercise factor of 3.39 and 3.54, respectively, for executives and 2.17 and 2.22, respectively, 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 first and second quarters of 2010, the Company used a suboptimal exercise factor of 2.15 and 2.30, respectively, for executives and 1.78 and 1.97, respectively, for non-executives, resulting in a calculated expected life of the option grants of five years for executives and four years for non-executives.

The weighted-average fair value of employee stock options granted during the three months ended June 30, 2011 and 2010 was $134.77 and $45.08 per share, respectively. The weighted-average fair value of employee stock options granted during the six months ended June 30, 2011 and 2010 was $122.16 and $35.24 per share, respectively.

The following table summarizes the assumptions used to value employee stock purchase rights for the offering period commencing in May 2010, using the Black Scholes option pricing model. There were no ESPP offerings in 2011, and the Company does not expect any future ESPP offerings.

 

     Three Months
Ended June 30,
2010
 

Dividend yield

     0

Expected volatility

     45

Risk-free interest rate

     0.24

Expected life (in years)

     0.5   

 

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Cash received from the issuance of common stock for the three months ended June 30, 2011 and 2010 was $7.4 million and $13.1 million, respectively. Cash received from the issuance of common stock for the six months ended June 30, 2011 and 2010 was $14.2 million and $23.0 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 six months ended June 30, 2011 and 2010 which was allocated as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 
     (in thousands)  

Fulfillment expense

   $ 679      $ 307      $ 1,240      $ 483   

Technology and development

     7,005        2,376        12,297        4,245   

Marketing

     1,485        756        2,734        1,399   

General and administrative

     6,367        3,489        11,529        6,303   
  

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation expense before income taxes

     15,536        6,928        27,800        12,430   

Income tax benefit

     (5,973     (2,820     (10,720     (5,054
  

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense after income taxes

   $ 9,563      $ 4,108      $ 17,080      $ 7,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

8. Income Taxes

The effective tax rates for the three months ended June 30, 2011 and 2010 were 38.4% and 40.7%, respectively. The effective tax rates for the six months ended June 30, 2011 and 2010 were 38.6% and 40.7%, respectively. As of December 31, 2010, the Company had $20.7 million of gross unrecognized tax benefits. During the six months ended June 30, 2011, the Company had an increase in gross unrecognized tax benefits of approximately $4.7 million. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $20.8 million to the 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 $18.3 million and $11.2 million, during the three month period ended June 30, 2011 and 2010, respectively, were recorded directly to additional paid-in capital. Income tax benefits attributable to the exercise of employee stock options of $33.4 million and $18.6 million, during the six month period ended June 30, 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 taxes. As of June 30, 2011, the total amount of gross interest and penalties accrued was $2.2 million, which is classified as “Other non-current liabilities” in the consolidated balance sheet.

The Company files U.S. federal and state tax returns. The Company is currently under examination by the IRS for the years 2008 and 2009. The years 1997 through 2007 (which represent approximately $3.2 million of the gross unrecognized tax benefit) remain subject to examination by the IRS but the statute of limitations for these years expires in 2011. The Company is currently under examination by the state of California for the years 2006 and 2007. The 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 balance of unrecognized tax benefits could significantly change within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.

9. Commitments and Contingencies

Streaming Content

The Company had $2,185.5 million and $1,075.2 million of commitments at June 30, 2011 and December 31, 2010, respectively, related to streaming content license agreements that do not meet content library asset recognition criteria. The license agreements do not meet content library asset recognition criteria because either the fee is not known or reasonably determinable for a specific title or it is known but the title is not yet available for streaming to subscribers. The Company also has $251.3 million of streaming content obligations which are included in other non-current liabilities on the consolidated balance sheets.

The expected timing of payments as of June 30, 2011 for these commitments is as follows:

 

     (in thousands)  

Less than one year

   $ 624,545   

Due after one year and through 3 years

     1,363,510   

Due after 3 years and through 5 years

     440,239  

Due after 5 years

     8,467   
  

 

 

 

Total streaming content obligations

   $ 2,436,761   
  

 

 

 

 

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The Company also has entered into certain license agreements that include an unspecified or a maximum number of titles that the Company may or may not receive in the 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 or what the ultimate price per title will be. However such amounts, which are not included in the commitments described above, are expected to be significant.

The Company has a license with a certain performing rights organization (“PRO”), and is currently involved in negotiations with other PROs, that hold certain rights to music used in connection with streaming content. For the latter, the Company accrues for estimated royalties that are due to PROs and adjusts these accruals based on any changes in estimates. While the Company 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 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 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, captioned Parallel 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 the Financial Accounting Standard Board’s Accounting Standards Codification (“ASC”) 450 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, captioned Alcatel-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; 5,623,656 entitled “Script Based Data Communication System and Method Utilizing State Memory” issued on April 22, 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 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 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. These cases have been consolidated in the Northern District of California and have been assigned the multidistrict litigation number MDL-2029. A number of substantially similar suits were filed in California State 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. A number of other cases have been filed in Federal and State courts by current or former subscribers to the online DVD rental service offered by Blockbuster Inc., alleging injury arising from similar facts. These cases have been related to MDL 2029 or, in the case of the California State cases, coordinated with the cases in Santa Clara County. The complaint(s) seeks unspecified compensatory and enhanced damages, interest, costs and fees and other equitable relief. 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.

 

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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, captioned Media 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 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.

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.

Indemnification

In the ordinary course of business, the Company 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.

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 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 in each particular agreement. No amount has been accrued in the accompanying financial statements with respect to these indemnification 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, contribution profit and operating income (loss) information for each of the reportable segments. Contribution profit is defined as revenues less cost of revenues and marketing expenses.

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.

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

 

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

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 
     (in thousands)  

Domestic

        

Free subscribers at end of period

     1,331        424        1,331        424   

Paid subscribers at end of period

     23,263        14,577        23,263        14,577   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total subscribers at end of period

     24,594        15,001        24,594        15,001   

Revenues

   $ 769,714      $ 519,819      $ 1,475,988      $ 1,013,484   

Cost of revenues and marketing expenses

     556,719        389,467        1,076,108        771,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution profit

     212,995        130,352        399,880        241,636   

Other operating expenses

     87,871        53,010        161,774        105,949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

   $ 125,124      $ 77,342      $ 238,106      $ 135,687   

International

        

Free subscribers at end of period

     110        —          110        —     

Paid subscribers at end of period

     857        —          857        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total subscribers at end of period

     967        —          967        —     

Revenues

   $ 18,896      $ —        $ 31,175      $ —     

Cost of revenues and marketing expenses

     28,242        —          51,263        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution profit (loss)

     (9,346     —          (20,088     —     

Other operating expenses

     664        —          664        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income (loss)

   $ (10,010   $ —        $ (20,752   $ —     

Consolidated

        

Free subscribers at end of period

     1,441        424        1,441        424   

Paid subscribers at end of period

     24,120        14,577        24,120        14,577   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total subscribers at end of period

     25,561        15,001        25,561        15,001   

Revenues

   $ 788,610      $ 519,819      $ 1,507,163      $ 1,013,484   

Cost of revenues and marketing expenses

     584,961        389,467        1,127,371        771,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution profit

     203,649        130,352        379,792        241,636   

Other operating expenses

     88,535        53,010        162,438        105,949   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 115,114      $ 77,342      $ 217,354      $ 135,687   

Other income (expense)

     (4,290     (3,972     (8,290     (7,959

Provision for income taxes

     42,610        29,851        80,617        51,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 68,214      $ 43,519      $ 128,447      $ 75,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; international expansion plans; our operating result trends, including subscriber additions, revenue and operating margins; impacts arising from our service offering changes; liquidity; our content library investments; future contractual obligations; and tax accounting. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to 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 our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (“SEC”) on February 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, unless required by law.

Overview

With more than 25 million subscribers as of June 30, 2011, we are the world’s leading Internet subscription service for enjoying TV shows and movies. Our subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and 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.

Our core strategy is to grow our streaming subscription business 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 our operating margin targets.

By continuously improving the customer experience, we believe we drive additional subscriber growth in the 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, 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 service offering, which in turn leads to more subscriber growth.

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

 

     Three Months Ended      Change  
     June 30,
2011
     March 31,
2011
     June 30,
2010
     Q2’11 vs.
Q1’11
    Q2’11 vs.
Q2’10
 
     (in thousands, except per share data and percentages)  

Revenues

   $ 788,610       $ 718,553       $ 519,819         9.7     51.7

Operating income

     115,114         102,240         77,342         12.6 %     48.8 %

Net income

     68,214         60,233         43,519         13.3     56.7

Net income per share — diluted

   $ 1.26       $ 1.11       $ 0.80         13.5     57.5

Total subscribers at end of period

     25,561         23,600         15,001         8.3     70.4

Net subscriber additions

     1,961         3,590         1,034         (45.4 )%      89.7

Free cash flow

   $ 59,545       $ 79,303       $ 34,215         (24.9 )%      74.0

The following represents our consolidated performance highlights for the six months ended June 30, 2011 and June 30, 2010:

 

     Six Months Ended      Change  
     June 30,
2011
     June 30,
2010
     YTD ‘11 vs.
YTD ‘10
 
     (in thousands, except per share data and percentages)  

Revenues

   $ 1,507,163       $ 1,013,484         48.7

Operating income

     217,354         135,687         60.2

Net income

     128,447         75,791         69.5

Net income per share — diluted

   $ 2.37       $ 1.39         70.5

Total subscribers at end of period

     25,561         15,001         70.4

Net subscriber additions

     5,551         2,733         103.1

Free cash flow

   $ 138,848       $ 71,807         93.4

 

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In September 2010, we began international operations by offering an unlimited streaming plan without DVDs in Canada. As of June 30, 2011, our international segment had over 0.9 million subscribers. We had revenues of $18.9 million and $31.2 million and operating losses of $10.0 million and $20.8 million for the three and six months ended June 30, 2011, respectively. We have announced our expansion plans into Latin America (Mexico, South America and the Caribbean) in the second half of 2011 and we anticipate further international expansion in 2012. We expect significant operating losses in the international segment in fiscal year 2011.

We are a pioneer in the Internet delivery of TV shows and movies, launching our streaming service in 2007. Since this launch, we have developed an ecosystem of Internet-connected devices and have licensed increasing amounts of content that enable consumers to enjoy TV shows and movies directly on their television sets, computers and mobile devices. As a result of these efforts, we have experienced growing consumer acceptance of and interest in the delivery of TV shows and movies directly over the Internet. We believe that the DVD portion of our service will be a fading differentiator to our streaming success and that offering separate streaming and DVD by mail services will help us prosper in streaming while allowing us to also renew focus on DVD by mail.

In July 2011, we introduced DVD only plans and separated the unlimited DVDs by mail and unlimited streaming into separate plans. This change gives our subscribers the option to subscribe to a streaming only plan, a DVD only plan or the option to subscribe to both. As a result of this change, we no longer offer a plan that includes both unlimited streaming and DVDs by mail. Subscribers receiving both will pay for each plan, which results in a price increase over our former offering. In addition, we are establishing a separate and distinct management team solely focused on DVDs by mail and will report the resulting DVD division as a separate operating segment in the fourth quarter of 2011, at which time we will have three operating segments: Domestic DVD, Domestic Streaming and International Streaming. We continue to focus on streaming, both domestically and internationally, and expect to continue to grow our subscribers, revenues, operating income and free cash flows. While we believe our new offerings will continue to be attractive to consumers, to the extent our subscribers do not, in sufficient numbers, opt for continuing to subscribe to both our DVD by mail and unlimited streaming plans or subscribe in greater numbers to our new offerings, our results of operations could be adversely impacted.

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.

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    March 31,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Revenues

     100.0     100.0     100.0     100.0     100.0
                                        

Cost of revenues:

          

Subscription

     54.3     52.5     51.1     53.4     51.8

Fulfillment expenses

     7.8     8.5     9.5     8.2     9.6
                                        

Total cost of revenues

     62.1     61.0     60.6     61.6     61.4
                                        

Operating expenses:

          

Technology and development

     7.3     7.1     7.3     7.2     7.4

Marketing

     12.0     14.5     14.3     13.2     14.8

General and administrative

     4.0     3.2     2.9     3.6     3.0
                                        

Total operating expenses

     23.3     24.8     24.5     24.0     25.2
                                        

Operating income

     14.6     14.2     14.9     14.4     13.4

Other income (expense):

          

Interest expense

     (0.7 )%      (0.7 )%      (0.9 )%      (0.7 )%      (1.0 )% 

Interest and other income

     0.2     0.2     0.1     0.2     0.2
                                        

Income before income taxes

     14.1     13.7     14.1     13.9     12.6

Provision for income taxes

     5.5     5.3     5.7     5.4     5.1
                                        

Net income

     8.6     8.4     8.4     8.5     7.5
                                        

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 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 have announced our expansion plans into Latin America (Mexico, South America and the Caribbean) in the second half of 2011 and we anticipate further international expansion in 2012.

 

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Table of Contents

We offer subscription plans in the United States and Canada that allow 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 also offer a variety of subscription plans that offer subscribers DVDs by mail. The price per plan for DVDs by mail varies based on the number of DVDs that a subscriber may have out at any given point. Customers electing access to 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. Following announcement of our service plan changes in July of 2011, in order to utilize both streaming and DVDs by mail, it is necessary to have subscriptions to both.

The following table presents our subscriber information by plan:

     As of/ Three Months Ended  
     June 30,
2011
    March 31,
2011
    June 30,
2010
 
     (in thousands)  

Domestic hybrid streaming and DVD by mail:

      

Net additions

     (196     1,134        1,034   

Free subscribers at end of period

     373        647        424   

Paid subscribers at end of period

     18,483        18,405        14,577   
  

 

 

   

 

 

   

 

 

 

Ending subscribers

     18,856        19,052        15,001   

Domestic streaming only:

      

Net additions

     1,993        2,162        —   

Free subscribers at end of period

     958        745        —   

Paid subscribers at end of period

     4,780        3,000        —   
  

 

 

   

 

 

   

 

 

 

Ending subscribers

     5,738        3,745        —   

International streaming only:

      

Net additions

     164        294        —   

Free subscribers at end of period

     110        130        —   

Paid subscribers at end of period

     857        673        —   
  

 

 

   

 

 

   

 

 

 

Ending subscribers

     967        803        —   

Total subscribers:

      

Net additions

     1,961        3,590        1,034   

Total free subscribers

     1,441        1,522        424   

As a percentage of total ending subscribers (1)

     5.6     6.4     2.8

Total paid subscribers

     24,120        22,078        14,577   

As a percentage of total ending subscribers

     94.4     93.6     97.2

Total ending subscribers

     25,561        23,600        15,001   

 

(1) The 2.6 percentage point increase in domestic free subscribers as a percentage of total domestic subscribers as of June 30, 2011 compared to June 30, 2010 is due to the expanded use of our one month free trial subscriptions over the previously used two week free trials.

 

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Table of Contents

Three months ended June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended      Change  
     June 30,
2011
     June 30,
2010
     Q2’11  vs.
Q2’10
 
     (in thousands, except percentages and average
monthly revenue per paying  subscriber)
 

Revenues

   $ 788,610       $ 519,819         51.7

Domestic

     769,714         519,819         48.1 %

International

     18,896         —          —    

Other domestic data:

        

Average number of paying subscribers

     22,334         14,100         58.4 %

Average monthly revenue per paying subscriber

   $ 11.49       $ 12.29         (6.5 )%

The $268.8 million increase in our consolidated revenues was primarily a result of the 58.4% growth in the domestic average number of paying subscribers. We believe this is due to the continuous improvement to our customer experience which in turn, drives consumer awareness of our service benefits available to paying subscribers. This increase was partially offset by a 6.5% decline in the domestic average monthly revenue per paying subscriber to $11.49, resulting from the continued growth of our lower priced subscription plans. As of June 30, 2011, approximately 90% of our domestic subscriber base had chosen either the unlimited streaming plan without DVDs at $7.99 per month or a 1 or 2 DVD-out unlimited plan, which were priced at $9.99 and $14.99 per month, respectively. As of June 30, 2010 approximately 75% of our domestic subscriber base had chosen either the 1 or 2-out DVD plan. No subscribers had chosen the unlimited streaming plan, as it was not introduced until September 2010.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended      Change  
     June 30,
2011
     June 30,
2010
     YTD’11  vs.
YTD’10
 
     (in thousands, except percentages and average
monthly revenue per paying  subscriber)
 

Revenues

   $ 1,507,163       $ 1,013,484         48.7

Domestic

     1,475,988         1,013,484         45.6 %

International

     31,175         —           —     

Other domestic data:

        

Average number of paying subscribers

     21,002         13,429         56.4 %

Average monthly revenue per paying subscriber

   $ 11.71       $ 12.58         (6.9 )%

The $493.7 million increase in our consolidated revenues was primarily a result of the 56.4% growth in the domestic average number of paying subscribers. We believe this is due to the continuous improvement to our customer experience which in turn, drives consumer awareness of our service benefits available to paying subscribers. This increase was partially offset by a 6.9% decline in the domestic average monthly revenue per paying subscriber to $11.71, resulting from the continued growth of our lower priced subscription plans.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended      Change  
     June 30,
2011
     March 31.
2011
     Q2’11 vs.
Q1’11
 
     (in thousands, except percentages and average
monthly revenue per paying  subscriber)
 

Revenues

   $ 788,610       $ 718,553         9.7

Domestic

     769,714         706,274         9.0 %

International

     18,896         12,279         53.9 %

Other domestic data:

        

Average number of paying subscribers

     22,334         19,670         13.5 %

Average monthly revenue per paying subscriber

   $ 11.49       $ 11.97         (4.0 )%

The $70.1 million increase in our consolidated revenues was primarily a result of the 13.5% growth in the domestic average number of paying subscribers. We believe this is due to the continuous improvement to our customer experience which in turn, drives consumer awareness of our service benefits available to paying subscribers. This increase was partially offset by a 4.0% decline in the domestic average monthly revenue per paying subscriber to $11.49, resulting from the continued growth of our lower priced subscription plans. As of June 30, 2011, approximately 23% of our ending domestic subscriber base had chosen the unlimited streaming plan without DVDs at $7.99 per month, compared to 16% as of March 31, 2011. In addition, 72% of all new domestic subscribers in these three months ended June 30, 2011 chose the unlimited streaming plan as compared to 54% in the three months ending March 31, 2011.

Given our recent separation of unlimited DVDs by mail and unlimited streaming plans we expect the lower priced plans to continue to grow as a percentage of our total subscriber base. However, as the average number of paying subscribers continues to grow and given the expected incremental revenue from our pricing changes, we anticipate that revenue will increase year over year.

 

18


Table of Contents

Cost of Revenues

Cost of Subscription

Cost of subscription revenues consists of expenses related to the acquisition and licensing of 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 content delivery networks to help us efficiently stream content in high volume to our subscribers over the Internet.

Three months ended June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages)  

Cost of subscription

   $ 428,203      $ 265,387        61.4 %

As a percentage of revenues

     54.3 %     51.1 %  

The $162.8 million increase in cost of subscription revenues was primarily due to a $163.1 million increase in content acquisition and licensing expenses mostly attributable to increased licensing of streaming content.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11  vs.
YTD’10
 
     (in thousands, except percentages)  

Cost of subscription

   $ 805,195      $ 524,947        53.4

As a percentage of revenues

     53.4 %     51.8 %  

The $280.2 million increase in cost of subscription revenues was due to the following factors:

 

  •  

Content acquisition and licensing expenses increased by $273.6 million mostly attributable to increased licensing of streaming content; and

 

  •  

Content delivery expenses increased $6.6 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. This increase was partially offset by a 1.9% decrease in the number of DVDs mailed to paying subscribers. The decrease in the number of DVDs mailed was driven by a 37.3% decline in monthly DVD rentals per average paying subscriber attributed to the growing popularity of our lower priced plans and growth in streaming, partially offset by a 56.4% increase in the domestic average number of paying subscribers.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages)  

Cost of subscription

   $ 428,203      $ 376,992        13.6

As a percentage of revenues

     54.3 %     52.5 %  

The $51.2 million increase in cost of subscription revenues was due to the following factors:

 

  •  

Content acquisition and licensing expenses increased by $57.3 million. This increase was mostly attributable to increased licensing of streaming content; and

 

  •  

Content delivery expenses decreased by $6.1 million primarily due to a 6.4% decrease in the number of DVDs mailed to paying subscribers. The decrease in the number of DVDs mailed was driven by a 17.6% decline in monthly DVD rentals per average paying subscriber attributed to the growing popularity of our lower priced plans and growth in streaming, partially offset by a 13.5% increase in the domestic average number of paying subscribers.

 

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Table of Contents

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 June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages)  

Fulfillment expenses

   $ 61,775      $ 49,547        24.7 %

As a percentage of revenues

     7.8 %     9.5 %  

The $12.2 million increase in fulfillment expenses was primarily due to a $10.2 million increase in the credit card fees as a result of the 51.7% growth in revenues.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11 vs.
YTD’10
 
     (in thousands except percentages)  

Fulfillment expenses

   $ 122,934      $ 97,149        26.5

As a percentage of revenues

     8.2     9.6  

The $25.8 million increase in fulfillment expenses was due to the following:

 

  •  

Credit card fees increased $18.9 million as a result of the 48.7% growth in revenues; and

 

  •  

Content processing and customer service related expenses increased $6.9 million primarily due to a $3.2 million increase in personnel-related costs resulting from salary increases.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages)  

Fulfillment expenses

   $ 61,775      $ 61,159        1.0 %

As a percentage of revenues

     7.8 %     8.5 %  

Fulfillment expenses were relatively flat due to the following:

 

  •  

Credit card fees increased $2.4 million as a result of the 9.7% growth in revenues; and

 

  •  

Content processing and customer service expenses decreased by $1.8 million primarily due to a 6% decrease in average headcount.

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 user interface, our recommendation and merchandising technology, 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, and in 2010, included certain costs paid for third-party Internet-based or “cloud” computing services used in connection with our business.

Three months ended June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages)  

Technology and development

   $ 57,865      $ 37,863        52.8 %

As a percentage of revenues

     7.3 %     7.3 %  

 

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Table of Contents

The $20.0 million increase in technology and development expenses was primarily the result of a $17.0 million increase in personnel-related costs. This increase in personnel-related costs is due to a 46% growth in average headcount supporting continued improvements in our service coupled with a $4.6 million increase in stock-based compensation expense.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11 vs.
YTD’10
 
     (in thousands, except percentages)  

Technology and development

   $ 108,770      $ 75,262        44.5 %

As a percentage of revenues

     7.2     7.4  

The $33.5 million increase in technology and development expenses was primarily attributable to a $29.9 million increase in personnel-related costs. These increases are due to the 39% growth in average headcount supporting continued improvements in our service coupled with an $8.1 million increase in stock-based compensation expense.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages)  

Technology and development

   $ 57,865      $ 50,905        13.7 %

As a percentage of revenues

     7.3 %     7.1  

The $7.0 million increase in technology and development expenses was primarily the result of a $5.2 million increase in personnel-related costs. This increase in personnel-related costs is primarily due to a 16% growth in average headcount supporting continued improvements to our service coupled with a $1.7 million increase in stock-based compensation expense.

Marketing

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

Three months ended June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages and subscriber
acquisition cost)
 

Marketing

   $ 94,983      $ 74,533        27.4 %

As a percentage of revenues

     12.0 %     14.3  

Other domestic data:

      

Gross subscriber additions

     5,315        3,059        73.7 %

Subscriber acquisition cost

   $ 15.09      $ 24.37        (38.1 )%

Churn (1)

     4.2 %     4.0     5.0 %

 

(1) Churn is a monthly measure defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber addition, then divided by three months.

The $20.5 million increase in marketing expenses was primarily attributable to a $24.2 million increase in marketing program spending, primarily from increased spending in television and radio advertising, coupled with an increase in our online advertising and payments to our affiliates. These increases were offset by a decrease in payments to consumer electronic partners, as well as a decrease in direct mail and inserts. Domestic subscriber acquisition cost decreased primarily due to continued strong organic subscriber growth.

 

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Table of Contents

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11 vs.
YTD’10
 
     (in thousands, except percentages and subscriber
acquisition cost)
 

Marketing

   $ 199,242      $ 149,752        33.0 %

As a percentage of revenues

     13.2 %     14.8  

Other domestic data:

      

Gross subscriber additions

     11,614        6,551        77.3 %

Subscriber acquisition cost

   $ 14.70      $ 22.86        (35.7 )%

Churn

     4.0 %     3.9 %     2.6 %

The $49.5 million increase in marketing expenses was primarily attributable to a $49.3 million increase in marketing program spending, primarily from increased spending in television and radio advertising, coupled with an increase in our online advertising and payments to our affiliates. Additionally, there was a $2.2 million increase in personnel-related costs. These increases were offset by a decrease in payments to consumer electronic partners and inserts. Domestic subscriber acquisition cost decreased primarily due to continued strong organic subscriber growth.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages and subscriber
acquisition cost)
 

Marketing

   $ 94,983      $ 104,259        (8.9 )%

As a percentage of revenues

     12.0 %     14.5 %  

Other domestic data:

      

Gross subscriber additions

     5,315        6,299        (15.6 )%

Subscriber acquisition cost

   $ 15.09      $ 14.38        4.9 %

Churn

     4.2 %     3.9 %     7.7 %

The $9.3 million decrease in marketing expenses was primarily attributable to a $4.9 million decrease in the cost of free trials due to a 47% decrease in free shipments. In addition, marketing program spending decreased by $4.1 million primarily due to a decrease in online advertising and inserts, offset by increased spending in television advertisements. Domestic subscriber acquisition cost increased due to incremental marketing spend in marginally less efficient channels.

General and Administrative

General and administrative expenses consist of payroll and related expenses for executive 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 June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages)  

General and administrative

   $ 30,670      $ 15,147        102.5 %

As a percentage of revenues

     4.0 %     2.9  

The $15.5 million increase in general and administrative expenses was primarily attributable to a $7.2 million increase in personnel-related costs, due to a $2.9 million increase in stock-based compensation expense and a 25% increase in average headcount. In addition, legal expenses increased $5.4 million due to an increase in costs associated with various claims against us.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11 vs.
YTD’10
 
     (in thousands, except percentages)  

General and administrative

   $ 53,668      $ 30,687        74.9

As a percentage of revenues

     3.6     3.0  

The $23.0 million increase in general and administrative expenses was primarily attributable to an $11.6 million increase in personnel-related costs, due to a $5.2 million increase in stock-based compensation expense and a 22% increase in average headcount. In addition, legal expenses increased $6.6 million due to an increase in costs associated with various claims against us.

 

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Table of Contents

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages)   

General and administrative

   $ 30,670      $ 22,998        33.4 %

As a percentage of revenues

     4.0 %     3.2 %  

The $7.7 million increase in general and administrative expenses was primarily attributable to a $4.2 million increase in costs associated with various claims against us, as well as an increase in personnel-related costs of $3.2 million, attributed to a $1.2 million increase in stock-based compensation expense and a 9% increase in headcount.

Income Taxes

Three months ended June 30, 2011 as compared to the three months ended June 30, 2010

 

     Three Months Ended     Change  
     June 30,
2011
    June 30,
2010
    Q2’11 vs.
Q2’10
 
     (in thousands, except percentages)   

Provision for income taxes

   $ 42,610      $ 29,851        42.7 %

Effective tax rate

     38.4     40.7  

Our effective tax rate for the second quarter of 2011 was 38.4% and differed from the federal statutory rate due primarily to state 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 June 30, 2010 and a lower effective tax rate for California.

Six months ended June 30, 2011 as compared to the six months ended June 30, 2010

 

     Six Months Ended     Change  
     June 30,
2011
    June 30,
2010
    YTD’11 vs.
YTD’10
 
     (in thousands, except percentages)   

Provision for income taxes

   $ 80,617      $ 51,937        55.2

Effective tax rate

     38.6     40.7  

Our effective tax rate for the six months ended June 30, 2011 was 38.6% and differed from the federal statutory rate due primarily to state 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 six months ended June 30, 2010 and a lower effective tax rate for California.

Three months ended June 30, 2011 as compared to the three months ended March 31, 2011

 

     Three Months Ended     Change  
     June 30,
2011
    March 31,
2011
    Q2’11 vs.
Q1’11
 
     (in thousands, except percentages)   

Provision for income taxes

   $ 42,610      $ 38,007        12.1 %

Effective tax rate

     38.4     38.7  

Our effective tax rate was relatively flat for the first and second quarters of 2011.

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 the acquisition and licensing of content, content delivery expenses, marketing, our stock repurchase programs, payroll related expenses, and capital expenditures related to information technology and automation equipment. We expect to continue to make substantial investments to license streaming content. These investments could impact our liquidity and in particular our operating cash flows.

 

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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 June 30, 2011, $80.6 million of this 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     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Net cash provided by operating activities

   $ 86,392      $ 60,252      $ 202,715      $ 137,457   

Net cash used in investing activities

     (34,949     (11,467     (108,624     (52,292

Net cash used in financing activities

     (26,655     (21,319     (113,383     (112,062

Operating Activities

Cash provided by operating activities increased $26.1 million or 43.4% during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, primarily due to an increase in cash received from subscribers for subscription fees of $279.5 million or 54.5%. This increase was partially offset by increased payments for content acquisition and licensing other than DVD content library of $182.2 million or 165.8% and increased payments for advertising and affiliates transactions of $27.0 million or 37.5%. Operating cash flows were further impacted by increased payroll expenses of $23.9 million, increased credit card fees of $10.2 million, a $4.6 million increase in taxes and a $5.5 million increase in other operating expenses.

Cash provided by operating activities increased $65.3 million or 47.5% during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, primarily due to an increase in cash received from subscribers for subscription fees of $520.2 million or 51.7%. This increase was partially offset by increased payments for content acquisition and licensing other than DVD content library of $327.6 million or 163.7% and increased payments for advertising and affiliates transactions of $36.9 million or 25.6%. Operating cash flows were further impacted by increased payroll expenses of $36.7 million, increased credit card fees of $18.9 million, a $10.0 million increase in taxes, a $7.4 million increase in payments for equipment and software maintenance, increased content delivery expenses of $6.6 million and a $10.8 million increase in other operating expenses.

Investing Activities

During the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, cash used in investing activities increased $23.5 million primarily due to a $22.7 million net increase in cash outflows from the purchases, sales and maturities of short-term investments as we allocate a higher portion of liquid assets into our portfolio in order to preserve capital, liquidity and return. In addition, purchases of property and equipment increased $3.0 million due to purchases of automation equipment for our various shipping centers. These increases in cash outflows were partially offset by a $5.1 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.

During the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, cash used in investing activities increased $56.3 million primarily due to a $58.1 million net increase in cash outflows from the purchases, sales and maturities of short-term investments as we allocate a higher portion of liquid assets into our portfolio in order to preserve capital, liquidity and return. In addition, purchases of property and equipment increased $12.9 million due to purchases of automation equipment for our various shipping centers. These increases in cash outflows were partially offset by a $19.9 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 June 30, 2011 as compared to the three months ended June 30, 2010, cash used in financing activities increased by $5.3 million primarily due to a $6.3 million increase in repurchases of common stock, and a $5.7 million decrease in proceeds from the issuance of common stock. These cash outflows were partially offset by an increase of $6.7 million in the excess tax benefits from stock-based compensation expense.

During the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, cash used in financing activities increased by $1.3 million primarily due to an $8.8 million decrease in proceeds from the issuance of common stock, and a $7.2 million increase in repurchases of common stock. These cash outflows were partially offset by an increase of $14.9 million in the excess tax benefits from stock-based compensation expense.

 

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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 and six months ended June 30, 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, maturities and sales of short-term 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:

 

     Three Months Ended     Six Months Ended  
     June 30,
2011
    June 30,
2010
    June 30,
2011
    June 30,
2010
 

Non-GAAP free cash flow reconciliation:

        

Net cash provided by operating activities

   $ 86,392      $ 60,252      $ 202,715      $ 137,457   

Acquisition of DVD content library

     (19,065     (24,191     (41,184     (61,093

Purchases of property and equipment

     (8,626     (5,671     (24,946     (12,064

Other assets

     844        3,825        2,263        7,507   
                                

Non-GAAP free cash flow

   $ 59,545      $ 34,215      $ 138,848      $ 71,807   
                                

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. The payment terms for these license fees may extend over the term of the license agreement, which typically range from six months to five years. License fee obligations with payment terms that are due beyond one year are classified on the consolidated balance sheets as “Other non-current liabilities.” Commitments for licenses that do not meet the criteria for asset recognition in the content library are included in Note 9 to the consolidated financial statements.

Free cash flow for the three months ended June 30, 2011 as compared to June 30, 2010 increased $25.3 million primarily due to increased net income of $24.7 million, increased stock-based compensation expense of $8.6 million and decreased tax prepayments of $8.1 million. This was partially offset by an increase in excess streaming and DVD content payments over expenses of $14.0 million. Payments for content increased $177.1 million while content expenses increased $163.1 million.

Free cash flow for the six months ended June 30, 2011 as compared to June 30, 2010 increased $67.0 million primarily due to increased net income of $52.7 million, increased stock-based compensation expense of $15.4 million and decreased tax prepayments of $18.7 million, and increase in deferred revenue of $18.4 million. This was partially offset by an increase in excess streaming and DVD content payments over expenses of $34.1 million. Payments for content increased $307.7 million while content expenses increased $273.6 million.

 

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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 June 30, 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 June 30, 2011:

 

     Payments due by Period  
Contractual obligations (in thousands):    Total      Less than
1 year (3)
     1-3 years      3-5 years      More than
5 years
 

8.50% senior notes

   $ 310,500       $ 17,000       $ 34,000       $ 34,000       $ 225,500   

Operating lease obligations

     51,731         15,039         22,894         10,534         3,264   

Lease financing obligations (1)

     21,279         4,129         6,605         5,886         4,659   

Streaming content obligations (2)

     2,436,761         624,545         1,363,510         440,239         8,467   

Other purchase obligations

     270,910         181,188         89,722         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,091,181       $ 841,901       $ 1,516,731       $ 490,659       $ 241,890   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the lease financing obligations for our Los Gatos, California headquarters.
(2) Streaming content obligations include agreements to acquire and license streaming 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 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 expected future cash outflows.

We have entered into certain license agreements that include an unspecified or a maximum number of titles that we may or may not receive in the 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 we will receive access to these titles or what the 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 and the expected timing of payments for these commitments could range from one year to more than five years.

 

(3) For purposes of this table, less than one year does not include liabilities which are reflected on the consolidated balance sheets.

As of June 30, 2011, we had gross unrecognized tax benefits of $25.4 million and an additional $2.2 million for gross interest and penalties classified as “Other non-current liabilities” in the consolidated balance sheet. At this time, we are not able to make a reasonably reliable estimate of the timing of payments in 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.

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.

Content Accounting

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 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

 

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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 “Additions to 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 contractual window of availability, which typically ranges from six months to five years. The amortization is classified in “Cost of revenues—Subscription” in the consolidated statements of operations and in the line item “Amortization of streaming content library” within net cash provided by operating activities in the consolidated statements of cash flows. Payment terms for these license fees may extend over the term of the license agreement, which could range from six months to five years. 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 item “Change in streaming content 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 asset recognition in the content library. Titles do not meet the criteria for asset recognition in the content library because the underlying license agreement does not specify the number of titles or the license fee per title or the windows of availability per title, so that the license fee is not known or reasonably determinable for a specific title. Typical payment terms for these agreements, which can range from three to five years, require us to make equal fixed payments at the beginning of each quarter of the license term. To the extent that cumulative payments exceed cumulative amortization, prepaid content is recorded 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 revenues—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 asset 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 related liabilities, is classified in the 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 revenues—Subscription” in the consolidated statement of operations and in the line item “Amortization of DVD 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 revenues—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 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 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 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 expense 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. This model requires 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.

 

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  •  

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 $0.9 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 $0.6 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 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 June 30, 2011, our estimated gross unrecognized tax benefits were $25.4 million of which $20.8 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, 2010. Our exposure to market risk has not changed significantly since December 31, 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.

 

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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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, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock repurchases during the three months ended June 30, 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)
 

April 1, 2011 – April 30, 2011

     216,000      $ 238.06        216,000      $ 80,575,302   

May 1, 2011 – May 31, 2011

     —           —           —        

June 1, 2011 – June 30, 2011

     —           —           —           —     
                                   

Total

     216,000       $ 283.06         216,000       $ 80,575,302   
                                   

 

(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 $300.0 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.

 

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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   
10.6†    2011 Stock Plan      Def 14A         000-49802       A    April 20, 2011   
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 June 30, 2011 filed with the SEC on July 27, 2011, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010, (ii) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 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.

 

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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 , I NC .
Dated: July 27, 2011   By:  

/s/    REED HASTINGS

   

Reed Hastings

Chief Executive Officer

(Principal executive officer)

   
Dated: July 27, 2011   By:  

/s/    DAVID WELLS

   

David Wells

Chief Financial Officer

(Principal financial and accounting officer)

   

 

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Table of Contents

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   
10.6†    2011 Stock Plan    Def 14A    000-49802    A    April 20, 2011   
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 June 30, 2011 filed with the SEC on July 27, 2011, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010, (ii) Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (iii) Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 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.

 

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