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NFLX-09.30.14-EX99.1


Exhibit 99.1
October 15, 2014
Fellow Shareholders,
Last quarter we added over 3 million members, ending Q3 with 53.1 million global members and $1.22 billion in revenue. We are forecasting adding another 4 million members in Q4, ending 2014 with over 57 million global members. Around the world, people are discovering the joy of Internet TV. With an incredible variety of original series, films and exclusive licensed content arriving on Netflix in the coming quarters, we will continue to thrill our members and expand our membership.

 (in millions except per share data and Streaming Content Obligations)
Q3 '13
Q4 '13
Q1 '14
Q2 '14
Q3 '14
Q4 '14 Forecast
Total Streaming:
 
 
 
 
 
 
Revenue
$
884

$
962

$
1,066

$
1,146

$
1,223

$
1,305

Contribution Profit
$
92

$
117

$
166

$
212

$
220

$
165

Contribution Margin
10.4
 %
12.2
 %
15.6
 %
18.5
 %
18.0
 %
12.6
 %
Paid Members
38.01

41.43

46.14

47.99

50.65

54.10

Total Members
40.28

44.35

48.35

50.05

53.06

57.06

Net Additions
2.73

4.07

4.00

1.69

3.02

4.00

 
 
 
 
 
 
 
Domestic Streaming:
 
 
 
 
 
 
Revenue
$
701

$
741

$
799

$
838

$
877

$
917

Contribution Profit
$
166

$
174

$
201

$
227

$
251

$
260

Contribution Margin
23.7
 %
23.4
 %
25.2
 %
27.1
 %
28.6
 %
28.4
 %
Paid Members
29.93

31.71

34.38

35.09

36.27

37.62

Total Members
31.09

33.42

35.67

36.24

37.22

39.07

Net Additions
1.29

2.33

2.25

0.57

0.98

1.85

 
 
 
 
 
 
 
International Streaming:
 
 
 
 
 
 
Revenue
$
183

$
221

$
267

$
307

$
346

$
388

Contribution Profit (Loss)
$
(74
)
$
(57
)
$
(35
)
$
(15
)
$
(31
)
$
(95
)
Contribution Margin
-40.6
 %
-25.9
 %
-13.1
 %
-5.0
 %
-8.9
 %
-24.5
 %
Paid Members
8.08

9.72

11.76

12.91

14.39

16.49

Total Members
9.19

10.93

12.68

13.80

15.84

17.99

Net Additions
1.44

1.74

1.75

1.12

2.04

2.15

 
 
 
 
 
 
 
Total (including DVD):
 
 
 
 
 
 
Operating Income
$
57

$
82

$
98

$
130

$
110

$
57

Net Income
$
32

$
48

$
53

$
71

$
59

$
27

EPS
$
0.52

$
0.79

$
0.86

$
1.15

$
0.96

$
0.44

 
 
 
 
 
 
 
Free Cash Flow
$
7

$
5

$
8

$
16

$
(74
)
 
Shares (FD)
61

61.3

61.5

61.6

61.8

 
Streaming Content Obligations* ($B)
$
6.5

$
7.3

$
7.1

$
7.7

$
8.9

 
*Corresponds to our total known streaming content obligations as defined in our financial statements and related notes in our most recently filed SEC Form 10-K

 
                                                                                                                                       1


Q3 Results and Q4 Expectations
We added about a million new members in the US, ending Q3 with 37.22 million members, with lower net additions than our forecast and versus the prior year. Domestic streaming revenue of $877 million, in-line with forecast, grew 25% y/y and faster than membership due to the expansion of ASP from the price changes implemented in Q2.

We added two million members internationally, to end the quarter with 15.84 million members, with lower net adds than our forecast, but higher than prior year. International revenue of $346 million, in-line with forecast, grew 89% y/y, and faster than membership, again due to the expansion of our ASP.

As a reminder, we provide you our internal forecast for the current quarter. For the prior three quarters, we under-forecasted membership growth. This quarter we over-forecasted membership growth. We’ll continue to give you our internal forecast for the current quarter, and it will be high some of the time and low other times.

Separate from forecast variability, year on year net additions in the US were down (1.3 million in Q3 2013 to 1 million in Q3 2014). As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago. Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.

In hindsight, we believe that late Q2 and early Q3 the impact of higher prices appeared to be offset for about two months by the large positive reception to Season Two of Orange is the New Black.
We remain happy with the price changes and growth in revenue and will continue to improve our service, with better content, better streaming and better choosing. The effect of slightly higher prices is factored into our Q4 forecast.
 
Since our per-member viewing and retention in the US are as strong as ever, we don’t think increased competition from piracy, TV Everywhere, Amazon Prime Instant Video, Hulu, etc, is a major factor.

There is no change to our view on the long term attractiveness and US market size of Internet television, and no change to our view of the ultimate size of our US membership.

We are forecasting Q4 US contribution margin to increase almost 500 basis points on a y/y basis, but to decrease slightly sequentially, as it did last year from Q3 to Q4, due to significant sequential increases in content and marketing expense.

In September, we had a very successful launch in France, Germany, Austria, Switzerland, Belgium and Luxembourg, adding about 66 million1 broadband households to our addressable market. In recent days, our app has gone live on set-top boxes from SFR in France and Deutsche Telekom in Germany, and we expect deployments this quarter from Orange and Bouygues in France, and Belgacom in Belgium. We’ve had more success, more quickly, with MVPD set-top boxes in these new markets than anywhere else in the world.



________________________
1SNL Kagan

 
                                                                                                                                       2


As expected, we have a full quarter of new market expenses weighing on our international contribution margins in Q4, increasing contribution loss from Q3 to Q4. Our international markets launched prior to this year (Canada 4 years ago through Netherlands 1 year ago) are now collectively profitable on a contribution basis and will continue to help us fund new markets. Moreover, contribution margin from our first expansion market, Canada, now approximates the US.
Starting in January, we have to pay higher VAT in most of Europe due to changes in European law (country of origin to country of destination). We will absorb these increases rather than pass them on to our members. This absorption will be reflected in slightly lower international contribution margin/profit starting in Q1 than we would otherwise have.
Given how well our international expansion has performed, we intend substantial further expansion in 2015, consistent with our stated strategy2.
US contribution margin increases beyond 30%
Our US contribution margin grew about 500 bps to 28.6% for Q3. After achieving 30% contribution margin, likely in Q1 or Q2 of next year, we will seek to grow margins an average of 200 basis points per year for the following years. Ideally, we will achieve 40% contribution margin five years after achieving 30%. This increase in our domestic contribution margin gives us room to increase content spending as we grow, as well as substantial domestic profitability.
Content
In Q3, we launched several new original series, documentaries and comedy specials, while ensuring future access to one of the most successful and globally appealing series of the North American fall TV season, Gotham. In our second year of qualification as a programmer, Netflix took home seven Emmy awards.
Original Series
BoJack Horseman marked our expansion into the popular adult animated comedy genre. In the past, we’ve licensed back seasons of already successful series like Archer, Futurama, and Bob’s Burgers. BoJack Horseman, starring Will Arnett, Aaron Paul, and Amy Sedaris, drew more viewers in its first few weeks than any of these established network shows over a comparable period on Netflix, confirming for us the value of expanding into original series. TV Guide wrote that BoJack Horseman3 was the “funniest show of the fall”4 and we are now in production on season two for 2015.
In Q3, we also launched a second season of Hemlock Grove and an original 4th and final season of The Killing. Both shows have been well received globally. We are now in pre-production of the final season of Hemlock Grove. We also premiered two acclaimed British series in North America, Happy Valley (in US and Canada) and Peaky Blinders (US only).
We are looking forward to the December 12 release of our next major original series Marco Polo, an epic, cinematic tale of power, adventure and betrayal.
________________________
2http://ir.netflix.com/long-term-view.cfm
3https://www.youtube.com/watch?v=i1eJMig5Ik4&list=PLvahqwMqN4M1uQ5JITdkmNrxZnwtUG-DP
4http://www.tvguide.com/news/netflix-bojack-horseman-1086697.aspx

 
                                                                                                                                       3


We are currently in production on nine Netflix original series around the world and during the quarter announced a new comedy series, Love, from Judd Apatow, premiering in 2016.
Original Documentary, Kids and Comedy
Beyond scripted series, we launched three original documentaries in the quarter, Battered Bastards of Baseball, Mission Blue and Print the Legend. These documentaries have grown in audience reach and have positioned Netflix as a significant player in a category that attracts some of the most loyal and intense viewers. Finishing off the year, we will release E-Team5, a powerful journalistic film from Oscar winning director Ross Kauffman and Katy Chevigny, and Virunga6, a riveting film about the tensions over one of Africa’s best known national parks and the home of the mountain gorillas.
Netflix continues to be a key destination for kids and families. We now offer members 75 kids series that are each delighting more than 2 million viewers on Netflix. More than a dozen of these series, many of them exclusive to Netflix, reach over 5 million viewers. During the quarter, we announced a partnership with Saban Brands to reboot the popular Popples animated series, with Rainbow Studios to extend their Winx Club stories and with storied producer Avi Arad and 41 Entertainment to produce a CGI film and series with a new take on the origin story of King Kong. In Q4, we will launch on Netflix the premiere episodes of two original series from DreamWorks Animation, the return of the beloved kids franchise Veggie Tales and All Hail King Julien, based on the popular character from Madagascar.
Last week, Chelsea Handler’s Uganda Be Kidding Me Live arrived globally on Netflix to strong viewing and rave7 reviews. Next year, Chelsea will create four comedy documentaries for Netflix with her new take on the traditional talk show to follow in 2016. In Q3, Jim Jeffries brought his latest stand-up show to Netflix members, while this quarter, our members will enjoy new material from Chelsea Peretti (Brooklyn Nine Nine) , Bill Burr, Wyatt Cenac (The Daily Show) and the legendary Bill Cosby.
Original Films
On August 28, 2015, we will release our first Netflix original film, Crouching Tiger Hidden Dragon: Green Legend. A big budget continuation of the beloved 2000 Oscar-nominated film, it will debut simultaneously on select global IMAX screens and in Ultra HD 4k on Netflix, offering consumers the option to see this beautiful action film how and when they want. Separately, we announced plans to release only on Netflix four new Adam Sandler feature comedies, beginning in early 2016. Sandler is a true global movie star, grossing over $3 billion over the last twenty years, and generating huge viewing across all Netflix territories. We are investing in original films because doing so can be favorable economically compared to current Pay TV deals and is consistent with the desires of the global on-demand generation to enjoy new movies without having to wait for months after they debut in US theaters.






________________________
5https://www.youtube.com/watch?v=AmPSNhlU8jw
6https://www.youtube.com/watch?v=iZlz_4iUKBs
7http://insidetv.ew.com/2014/10/10/uganda-be-kidding-me-netflix-react/

 
                                                                                                                                       4


Multi-territory Television Licensing
In Q3, we secured second window rights from Warner Bros. Television for the Fox series Gotham in all current and planned Netflix territories. This historic deal will deliver the series to Netflix members soon after the broadcast completion of each season and ensures that Netflix will be the only subscription video service in these territories to offer the Batman origin series, commercial free and on demand in full season presentations.
In our just launched territories in Europe, Netflix debuted as original series the Emmy-winning Fargo from MGM Television as well as From Dusk Till Dawn from El Rey and Penny Dreadful from CBS Television. These deals ensure our international members access to hit US television series without having to wait the months or years imposed by traditional TV models and should help to reduce piracy in those markets.
Product
Improved Laptop Streaming
We are midway through switching to native HTML5 streaming for our laptop players, eliminating downloads (of Silverlight) and improving the consumer proposition with a smoother playback experience and longer battery life. This has been a successful four-year effort to get strong DRM integrated into the major browsers.
Set-top Boxes
Using the same techniques we developed to get on hundreds of different Blu-ray players and Smart TVs, we are now able to support a wide variety of MVPD set-top devices with an outstanding and updatable application. The Virgin/TiVo architecture was our first, which is a fairly modern system. We have since expanded to less high-end systems.
Personal recommendations
We have continued to improve our various recommendations systems, which match users to content based upon their preferences. We have rolled out a new visual search feature on the website and mobile platforms; it includes suggested viewing possibilities for searches that come up empty.

Strong Net Neutrality
We continue to focus on strong net neutrality, including interconnection, to prevent large ISPs from holding our joint customers hostage with poor performance in order to extract payments from us, other Internet content firms, and Internet transit suppliers such as Level 3 and Cogent.
We’ve increased awareness of this issue globally. Our efforts have helped generate a record breaking number of comments to the FCC in favor of net neutrality, while in Europe policymakers are beginning to focus on this issue.
We will continue to advocate for the US government to block the merger of Comcast/TWC or, at the very least, prevent a combined entity from charging for interconnection.


 
                                                                                                                                       5


HBO
Starting back in 2011 we started saying8 that HBO would be our primary long-term competitor, particularly for content. The competition will drive us both to be better. It was inevitable and sensible that they would eventually offer their service as a standalone application. Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV.
DVD
Our DVD-by-mail service in the US continues to delight about 6 million members, adding $89 million in contribution profit in Q3 and we anticipate close to the same in Q4.
Operating Income
Operating income nearly doubled y/y to $110 million despite our investment in international expansion. To support this expansion, we’ve invested in personnel growth in our corporate G&A functions which is the primary driver of both the y/y and sequential increase in G&A. Also contributing to the sequential increase was an increase in legal fees and one-time costs related to the launch of our new markets.
Free Cash Flow & Content Obligations

Historically, FCF tracked close to net income. As we’ve written previously, our increased use of cash for content, especially originals, will cause FCF to be materially less than net income, at least for the years ahead while we are increasing our investment in this area. In addition, in quarters like Q3 with big international territory launches, we have only a partial quarter of international content P&L expense but a full quarter of cash payments. We finished the quarter with $1.7 billion in cash.

________________________
8http://mediadecoder.blogs.nytimes.com/2011/12/06/netflixs-chief-sees-hbo-as-its-main-rival/?_php=true&_type=blogs&_php=true&_type=blogs&_r=1&

 
                                                                                                                                       6


Our total streaming content obligations increased to $8.9 billion in the quarter from $7.7 billion at the end of Q2, which includes $3.6 billion on the balance sheet. The increase was driven by the multi-year commitments associated with our latest market launches in Europe and the continued expansion of our original programming, including our first original movie Crouching Tiger Hidden Dragon: Green Legend.
Reference
For quick reference, our eight most recent investor letters are: July 20149. April 201410, January 201411, October 201312, July 201313, April 201314, January 201315, October 201216.

Summary

The overwhelming consumer benefits of Internet television, in terms of convenience, control, selection, and price, continue to expand our opportunity.


Sincerely,
 
Reed Hastings, CEO
David Wells, CFO

________________________
9http://files.shareholder.com/downloads/NFLX/3527949458x0x769748/9b21df7f-743c-4f0f-94da-9f13e384a3d2/July2014EarningsLetter_7.21.14_final.pdf
10http://files.shareholder.com/downloads/NFLX/3337146746x0x745654/fb5aaae0-b991-4e76-863c-3b859c8dece8/Q114%20Earnings%20Letter%204.21.14%20final.pdf
11http://files.shareholder.com/downloads/NFLX/3337146746x0x720306/119321bc-89c3-4306-93ac-93c02da2354f/Q4%2013%20Letter%20to%20shareholders.pdf
12http://files.shareholder.com/downloads/NFLX/2531040512x0x698481/ecfe1ab4-66f5-4e23-a64a-1ca025216e5e/Q313%20Earnings%20Letter%2010.21.13%2010.30am.pdf
13http://files.shareholder.com/downloads/NFLX/2531040512x0x678215/a9076739-bc08-421e-8dba-52570f4e489e/Q213%20Investor%20Letter.pdf
14http://ir.netflix.com/common/download/download.cfm?companyid=NFLX&fileid=655293&filekey=5c1951a4-e79c-49c8-bb83-1595635bf934&filename=Investor_Letter_Q12013.pdf
15http://files.shareholder.com/downloads/NFLX/2531040512x0x630302/e7656660-df35-4384-9f39-cb0f39e54f0b/Investor%20Letter%20Q42012%2001.23.13.pdf
16http://files.shareholder.com/downloads/NFLX/2531040512x0x607614/6bc75664-8a60-4398-8e52-fe918b79bf67/Investor%20Letter%20Q3%202012%2010.23.12.pdf

 
                                                                                                                                       7


October 15, 2014 Earnings Interview
Reed Hastings, David Wells and Ted Sarandos will participate in a live video interview today at 3 p.m. Pacific Time at youtube.com/netflixir. The interview will be conducted by Michael Nathanson, MoffettNathanson and Doug Anmuth, J.P. Morgan. Questions that investors would like to see asked should be sent to michael@moffettnathanson.com or douglas.anmuth@jpmorgan.com.

IR Contact:
PR Contact:
Erin Kasenchak

Jonathan Friedland

Director, Investor Relations

Chief Communications Officer

408 540-3691

310 734-2958


 
                                                                                                                                       8



Use of Non-GAAP Measures
This shareholder letter and its attachments include reference to the non-GAAP financial measure of free cash flow. Management believes that 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 and for certain other activities. However, this non-GAAP measure should be considered in addition to, not as a substitute for or superior to, net income, operating income, diluted earnings per share and net cash provided by operating activities, or other financial measures prepared in accordance with GAAP. Reconciliation to the GAAP equivalent of this non-GAAP measure is contained in tabular form on the attached unaudited financial statements.
 
Forward-Looking Statements
This shareholder letter contains certain forward-looking statements within the meaning of the federal securities laws, including statements regarding international expansion and performance; content offerings; device and platform integration; forecast variability; member growth domestically and internationally, including net, total and paid; revenue, contribution profit (loss) and contribution margin for both domestic (streaming and DVD) and international operations, as well as consolidated operating income, net income, earnings per share and free cash flow. The forward-looking statements in this letter are subject to risks and uncertainties that could cause actual results and events to differ, including, without limitation: our ability to attract new members and retain existing members; our ability to compete effectively; maintenance and expansion of device platforms for instant streaming; fluctuations in consumer usage of our service; service disruptions; production risks; actions of Internet Service Providers; and, widespread consumer adoption of different modes of viewing in-home filmed entertainment. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 3, 2014. The Company provides internal forecast numbers. Investors should anticipate that actual performance will vary from these forecast numbers based on risks and uncertainties discussed above and in our Annual Report on Form 10-K. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this shareholder letter.







 
                                                                                                                                       9



Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
June 30,
2014
 
September 30,
2013 (1)
 
September 30,
2014
 
September 30,
2013 (1)
Revenues
$
1,409,432

 
$
1,340,407

 
$
1,105,999

 
$
4,019,928

 
$
3,199,332

Cost of revenues
954,394

 
914,848

 
798,900

 
2,738,428

 
2,296,526

Marketing
145,654

 
120,763

 
108,228

 
403,515

 
341,925

Technology and development
120,953

 
115,182

 
95,540

 
346,445

 
280,641

General and administrative
78,024

 
60,014

 
46,211

 
193,938

 
134,181

Operating income
110,407

 
129,600

 
57,120

 
337,602

 
146,059

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(13,486
)
 
(13,328
)
 
(7,436
)
 
(36,866
)
 
(21,704
)
Interest and other income (expense)
616

 
1,100

 
(193
)
 
3,117

 
(2,156
)
Loss on extinguishment of debt

 

 

 

 
(25,129
)
Income before income taxes
97,537

 
117,372

 
49,491

 
303,853

 
97,070

Provision for income taxes
38,242

 
46,354

 
17,669

 
120,425

 
33,088

Net income
$
59,295

 
$
71,018

 
$
31,822

 
$
183,428

 
$
63,982

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.99

 
$
1.18

 
$
0.54

 
$
3.06

 
$
1.11

Diluted
$
0.96

 
$
1.15

 
$
0.52

 
$
2.97

 
$
1.06

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
60,171

 
59,996

 
59,108

 
59,996

 
57,769

Diluted
61,820

 
61,634

 
60,990

 
61,669

 
60,578

 
(1) Certain prior period amounts have been reclassified from "Marketing" to "Cost of revenues" to conform to current period presentation.





 
                                                                                                                                       10




Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
 
 
As of
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,183,217

 
$
604,965

Short-term investments
483,602

 
595,440

Current content library, net
2,006,981

 
1,706,421

Other current assets
149,682

 
151,937

Total current assets
3,823,482

 
3,058,763

Non-current content library, net
2,631,882

 
2,091,071

Property and equipment, net
144,147

 
133,605

Other non-current assets
178,818

 
129,124

Total assets
$
6,778,329

 
$
5,412,563

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
2,074,766

 
$
1,775,983

Accounts payable
150,374

 
108,435

Accrued expenses
70,559

 
54,018

Deferred revenue
252,956

 
215,767

Total current liabilities
2,548,655

 
2,154,203

Non-current content liabilities
1,510,403

 
1,345,590

Long-term debt
900,000

 
500,000

Other non-current liabilities
94,397

 
79,209

Total liabilities
5,053,455

 
4,079,002

Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 160,000,000 shares authorized at September 30, 2014 and December 31, 2013; 60,246,379 and 59,607,001 issued and outstanding at September 30, 2014 and December 31, 2013, respectively
60

 
60

Additional paid-in capital
987,256

 
777,441

Accumulated other comprehensive income
1,645

 
3,575

Retained earnings
735,913

 
552,485

Total stockholders' equity
1,724,874

 
1,333,561

Total liabilities and stockholders' equity
$
6,778,329

 
$
5,412,563

 

 
                                                                                                                                       11



Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
June 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income
$
59,295

 
$
71,018

 
$
31,822

 
$
183,428

 
$
63,982

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
Additions to streaming content library
(1,202,484
)
 
(813,314
)
 
(878,314
)
 
(2,765,197
)
 
(2,063,709
)
Change in streaming content liabilities
346,752

 
78,359

 
310,191

 
467,355

 
327,175

Amortization of streaming content library
686,154

 
639,037

 
553,394

 
1,925,926

 
1,549,384

Amortization of DVD content library
18,269

 
16,923

 
17,546

 
51,313

 
53,492

Depreciation and amortization of property, equipment and intangibles
14,357

 
12,977

 
11,452

 
39,716

 
35,529

Stock-based compensation expense
29,878

 
29,285

 
18,477

 
84,988

 
54,178

Excess tax benefits from stock-based compensation
(21,060
)
 
(14,628
)
 
(20,492
)
 
(68,420
)
 
(52,475
)
Other non-cash items
3,360

 
3,251

 
1,994

 
8,807

 
4,932

Loss on extinguishment of debt

 

 

 

 
25,129

Deferred taxes
(7,892
)
 
(16,569
)
 
(2,424
)
 
(37,564
)
 
(11,212
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Other current assets
12,960

 
(20,685
)
 
9,920

 
27,341

 
37,955

Accounts payable
13,003

 
(3,086
)
 
(5,877
)
 
32,729

 
6,004

Accrued expenses
(6,980
)
 
59,008

 
(11,451
)
 
51,586

 
(5,089
)
Deferred revenue
11,626

 
11,315

 
9,252

 
37,189

 
26,351

Other non-current assets and liabilities
5,323

 
3,133

 
(10,797
)
 
15,747

 
4,760

Net cash (used in) provided by operating activities
(37,439
)
 
56,024

 
34,693

 
54,944

 
56,386

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of DVD content library
(15,530
)
 
(20,981
)
 
(15,471
)
 
(51,425
)
 
(50,687
)
Purchases of property and equipment
(21,032
)
 
(19,869
)
 
(10,828
)
 
(54,235
)
 
(31,034
)
Other assets
341

 
1,129

 
(1,329
)
 
1,765

 
3,808

Purchases of short-term investments
(123,883
)
 
(170,908
)
 
(116,116
)
 
(355,337
)
 
(497,789
)
Proceeds from sale of short-term investments
107,568

 
89,662

 
81,185

 
340,278

 
196,392

Proceeds from maturities of short-term investments
32,125

 
92,014

 
48,890

 
127,229

 
58,720

Net cash (used in) provided by investing activities
(20,411
)
 
(28,953
)
 
(13,669
)
 
8,275

 
(320,590
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
9,877

 
14,469

 
25,561

 
56,794

 
93,553

Proceeds from issuance of debt

 

 

 
400,000

 
500,000

Issuance costs

 
(353
)
 

 
(7,080
)
 
(9,414
)
Redemption of debt

 

 

 

 
(219,362
)
Excess tax benefits from stock-based compensation
21,060

 
14,628

 
20,492

 
68,420

 
52,475

Principal payments of lease financing obligations
(275
)
 
(271
)
 
(258
)
 
(813
)
 
(916
)
Net cash provided by financing activities
30,662

 
28,473

 
45,795

 
517,321

 
416,336

 Effect of exchange rate changes on cash and cash equivalents
(3,839
)
 
1,250

 
1,559

 
(2,288
)
 
(3,367
)
 Net (decrease) increase in cash and cash equivalents
(31,027
)
 
56,794

 
68,378

 
578,252

 
148,765

 Cash and cash equivalents, beginning of period
1,214,244

 
1,157,450

 
370,678

 
604,965

 
290,291

 Cash and cash equivalents, end of period
$
1,183,217

 
$
1,214,244

 
$
439,056

 
$
1,183,217

 
$
439,056

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
June 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Non-GAAP free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(37,439
)
 
$
56,024

 
$
34,693

 
$
54,944

 
$
56,386

Acquisition of DVD content library
(15,530
)
 
(20,981
)
 
(15,471
)
 
(51,425
)
 
(50,687
)
Purchases of property and equipment
(21,032
)
 
(19,869
)
 
(10,828
)
 
(54,235
)
 
(31,034
)
Other assets
341

 
1,129

 
(1,329
)
 
1,765

 
3,808

Non-GAAP free cash flow
$
(73,660
)
 
$
16,303

 
$
7,065

 
$
(48,951
)
 
$
(21,527
)

 
                                                                                                                                       12



Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
 
As of / Three Months Ended
 
As of/ Nine Months Ended
 
September 30,
2014
 
June 30,
2014
 
September 30,
 2013 (1)
 
September 30,
2014
 
September 30,
2013 (1)
Domestic Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
37,219

 
36,244

 
31,092

 
37,219

 
31,092

Paid members at end of period
36,265

 
35,085

 
29,925

 
36,265

 
29,925

 
 
 
 
 
 
 
 
 
 
Revenues
$
877,150

 
$
838,225

 
$
701,083

 
$
2,513,992

 
$
2,010,821

Cost of revenues
565,251

 
546,223

 
473,965

 
1,628,568

 
1,366,897

Marketing
61,045

 
64,727

 
60,637

 
206,030

 
194,779

Contribution profit
250,854

 
227,275

 
166,481

 
679,394

 
449,145

 
 
 
 
 
 
 
 
 
 
International Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
15,843

 
13,801

 
9,188

 
15,843

 
9,188

Paid members at end of period
14,389

 
12,907

 
8,084

 
14,389

 
8,084

 
 
 
 
 
 
 
 
 
 
Revenues
$
345,685

 
$
307,461

 
$
183,051

 
$
920,264

 
$
490,972

Cost of revenues
291,942

 
266,697

 
209,811

 
803,906

 
561,103

Marketing
84,609

 
56,036

 
47,537

 
197,485

 
146,919

Contribution profit (loss)
(30,866
)
 
(15,272
)
 
(74,297
)
 
(81,127
)
 
(217,050
)
 
 
 
 
 
 
 
 
 
 
Domestic DVD
 
 
 
 
 
 
 
 
 
Total members at end of period
5,986

 
6,261

 
7,148

 
5,986

 
7,148

Paid members at end of period
5,899

 
6,167

 
7,014

 
5,899

 
7,014

 
 
 
 
 
 
 
 
 
 
Revenues
$
186,597

 
$
194,721

 
$
221,865

 
$
585,672

 
$
697,539

Cost of revenues
97,201

 
101,928

 
115,124

 
305,954

 
368,526

Marketing

 

 
54

 

 
227

Contribution profit
89,396

 
92,793

 
106,687

 
279,718

 
328,786

 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,409,432

 
$
1,340,407

 
$
1,105,999

 
$
4,019,928

 
$
3,199,332

Cost of revenues
954,394

 
914,848

 
798,900

 
2,738,428

 
2,296,526

Marketing
145,654

 
120,763

 
108,228

 
403,515

 
341,925

Contribution profit
309,384

 
304,796

 
198,871

 
877,985

 
560,881

Other operating expenses
198,977

 
175,196

 
141,751

 
540,383

 
414,822

Operating income
110,407

 
129,600

 
57,120

 
337,602

 
146,059

Other income (expense)
(12,870
)
 
(12,228
)
 
(7,629
)
 
(33,749
)
 
(23,860
)
Loss on extinguishment of debt

 

 

 

 
(25,129
)
Provision for income taxes
38,242

 
46,354

 
17,669

 
120,425

 
33,088

Net income
$
59,295

 
$
71,018

 
$
31,822

 
$
183,428

 
$
63,982


(1) Certain prior period amounts have been reclassified from "Marketing" to "Cost of revenues" to conform to current period presentation.


 
                                                                                                                                       13
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