LOS GATOS, Calif., July 25 /PRNewswire-FirstCall/ -- Netflix, Inc. (NASDAQ:NFLX) today reported results for the second quarter ended June 30, 2008.
"We are pleased to announce another quarter of strong financial results," said Reed Hastings, Netflix co-founder and chief executive officer.
"This quarter we delivered 25 percent year-over-year growth in subscribers, our lowest SAC ever as a public company, and a 14 percent increase in EPS for the quarter. And we made important progress on our strategy of offering our subscribers the option of streaming video directly to their TVs with the introduction of The Netflix Player by Roku(TM) in May and the announcement earlier this month of our agreement with Microsoft to embed Netflix streaming capability in the Xbox 360 video game and entertainment system."
Second-Quarter 2008 Financial Highlights
Subscribers. Netflix ended the second quarter of 2008 with approximately 8,411,000 total subscribers, representing 25 percent year-over-year growth from 6,742,000 total subscribers at the end of the second quarter of 2007 and 2 percent sequential growth from 8,243,000 subscribers at the end of the first quarter of 2008.
Net subscriber change in the quarter was an increase of 168,000, compared to a decrease of 55,000 for the same period of 2007 and an increase of 764,000 for the first quarter of 2008.
Gross subscriber additions for the quarter totaled 1,384,000, representing 35 percent year-over-year growth from 1,028,000 gross subscriber additions in the second quarter of 2007 and 26 percent quarter-over-quarter decline from 1,862,000 gross subscriber additions in the first quarter of 2008.
Of the 8,411,000 total subscribers at quarter end, 98 percent, or 8,235,000 were paid subscribers. The other 2 percent, or 176,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the second quarter of 2007 and at the end of the first quarter of 2008.
Revenue for the second quarter of 2008 was $337.6 million, representing 11 percent year-over-year growth from $303.7 million for the second quarter of 2007, and 4 percent sequential increase from $326.2 million for the first quarter of 2008.
Gross margin (1) for the second quarter of 2008 was 31.8 percent, compared to 35.2 percent for the second quarter of 2007 and 31.7 percent for the first quarter of 2008.
GAAP net income for the second quarter of 2008 was $26.6 million, or $0.42 per diluted share, compared to GAAP net income of $25.6 million, or $0.37 per diluted share, for the second quarter of 2007 and GAAP net income of $13.4 million, or $0.21 per diluted share, for the first quarter of 2008. GAAP net income grew 4 percent on a year-over-year basis and GAAP EPS grew 14 percent on a year-over-year basis.
Non-GAAP net income was $28.7 million, or $0.45 per diluted share, for the second quarter of 2008, compared to non-GAAP net income of $27.2 million, or $0.39 per diluted share, for the second quarter of 2007 and non-GAAP net income of $15.2 million, or $0.23 per diluted share, for the first quarter of 2008. Non-GAAP net income grew 5 percent on a year-over-year basis and non- GAAP EPS grew 15 percent on a year-over-year basis.
Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense, net of taxes.
Stock-based compensation for the second quarter of 2008 was $2.9 million, compared to $2.8 million in the second quarter of 2007 and $3.1 million in the first quarter of 2008. Stock-based compensation is presented in the same lines of the Consolidated Statements of Operations as cash compensation paid to the same individuals.
Subscriber acquisition cost(2) for the second quarter of 2008 was $28.95 per gross subscriber addition, compared to $44.02 for the same period of 2007 and $29.50 for the first quarter of 2008.
Churn(3) for the second quarter of 2008 was 4.2 percent, compared to 4.6 percent for the second quarter of 2007 and 3.9 percent for the first quarter of 2008. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.
Free cash flow(4) for the second quarter of 2008 was $12.5 million, compared to $6.5 million in the second quarter of 2007 and $4.7 million for the first quarter of 2008.
Cash provided by operating activities for the second quarter of 2008 was $77.9 million, compared to $65.1 million for the second quarter of 2007 and $77.7 million for the first quarter of 2008.
(1) Gross margin is defined as revenues less cost of subscription and fulfillment expenses divided by revenues.
(2) Subscriber acquisition cost is defined as the total marketing expense, which includes stock-based compensation for marketing personnel, on the Company's Consolidated Statements of Operations divided by total gross subscriber additions during the quarter.
(3) Churn is defined as customer cancellations in the quarter divided by the sum of beginning subscribers and gross subscriber additions, divided by three months.
(4) Free cash flow is defined as cash provided by operating activities excluding the non-operational cash flows from purchases and sales of short-term investments, cash flows from investment in business and cash flows from financing activities.
Business Outlook
The Company's performance expectations for the third and fourth quarters of 2008 and full-year 2008 are as follows:
Third-Quarter 2008 -- Ending subscribers of 8.675 million to 8.875 million -- Revenue of $343 million to $348 million -- GAAP net income of $16 million to $21 million -- GAAP EPS of $0.26 to $0.34 per diluted share
Fourth-Quarter 2008 -- Ending subscribers of 9.1 million to 9.7 million -- Revenue of $357 million to $367 million -- GAAP net income of $18 million to $23 million -- GAAP EPS of $0.29 to $0.37 per diluted share
Full-Year 2008 -- Ending subscribers of 9.1 million to 9.7 million, unchanged from prior guidance -- Revenue of $1.364 billion to $1.379 billion, tightened from $1.35 billion to $1.39 billion -- GAAP net income of $75 million to $83 million, unchanged from prior guidance -- GAAP EPS of $1.19 to $1.31 per diluted share, increased from $1.16 to $1.29 per diluted share
Float and Trading Plans
The Company estimates the public float at approximately 49,996,277 shares as of June 30, 2008, up approximately 1 percent from 49,498,642 shares as of March 31, 2008, based on registered shares held in street name with the Depository Trust and Clearing Corporation. From time to time executive officers of Netflix may elect to buy or sell stock in Netflix. All open market sales by executive officers are made pursuant to the terms of 10b5-1 Trading Plans approved by the Company and generally adopted no less than three months prior to the first date of sale under such plan.
Earnings Call
The Netflix earnings call will be webcast today at 8:30 a.m. Eastern Time / 5:30 a.m. Pacific Time, and may be accessed at http://ir.netflix.com/. The call will consist of prepared remarks, followed by a Q&A with questions submitted via email. Please email your questions to . The company will read the questions aloud on the call and respond to as many questions as possible in the hour allotted to the earnings call.
Following completion of the call, a replay of the webcast will be available at http://ir.netflix.com/. The telephone replay of the call will be available from approximately 8:30 a.m. Pacific Time on July 25, 2008 through July 29, 2008 at 9:00 p.m. Pacific Time. To listen to the telephone replay, call (719) 457-0820, access code 4599200.
Market Data 
Markets 
AI
