Netflix (NFLX)

Fourth-Quarter and Fiscal-Year 2005 Financial Highlights

Revenue for the fourth quarter of 2005 was a record $195.0 million, representing 36 percent year-over-year growth from $143.9 million for the fourth quarter of 2004, and 12 percent quarter-over-quarter growth from $174.3 million for the third quarter of 2005. Revenue for fiscal 2005 was $688.0 million, up 36 percent from $506.2 million for fiscal 2004.

GAAP net income for the fourth quarter of 2005 was $38.1 million, or $0.57 per diluted share, compared to GAAP net income of $5.6 million, or $0.09 per diluted share, for the fourth quarter of 2004 and GAAP net income of $6.9 million, or $0.11 per diluted share, for the third quarter of 2005.

GAAP net income for the fourth quarter included a benefit of the realized deferred tax assets of $30.2 million, or approximately $0.45 per diluted share, related to the recognition of the Company’s deferred tax assets. The Company had previously discussed its expectation to realize these deferred tax assets in the near future. The Company has concluded, pursuant to Statement of Financial Accounting Standards No. 109, that the deferred tax assets are more likely than not to be realized.

GAAP net income for fiscal 2005 was $41.9 million, or $0.64 per diluted share, compared to GAAP net income of $21.6 million, or $0.33 per diluted share, for fiscal 2004.

GAAP net income for fiscal 2005 included a benefit of the realized deferred tax assets of $30.2 million, or approximately $0.46 per diluted share, related to the recognition of the Company’s deferred tax assets.

Non-GAAP net income was $41.4 million, or $0.62 per diluted share, for the fourth quarter of 2005, compared to non-GAAP net income of $9.9 million, or $0.16 per diluted share, for the fourth quarter of 2004 and non-GAAP net income of $10.2 million, or $0.16 per diluted share, for the third quarter of 2005. Excluding the benefit of the realized deferred tax assets in the quarter, non-GAAP net income was $11.3 million, or $0.17 per diluted share.

Non-GAAP net income was $56.3 million, or $0.86 per diluted share, for fiscal 2005 compared to non-GAAP net income of $38.2 million, or $0.59 per diluted share for fiscal 2004. Excluding the benefit of the realized deferred tax assets, non-GAAP net income for fiscal 2005 was $26.1 million, or $0.40 per diluted share.

Non-GAAP net income equals net income on a GAAP basis before stock-based compensation expense.

Gross margin for the fourth quarter of 2005 was 47.1 percent, compared to 45.5 percent for the fourth quarter of 2004 and 43.2 percent for the third quarter of 2005.

Free cash flow¹ for the fourth quarter of 2005 was $24.3 million, compared to $5.4 million in the fourth quarter of 2004 and $7.0 million for the third quarter of 2005. Free cash flow for fiscal 2005 was $24.3 million as compared to $34.8 million in fiscal 2004.

Cash provided by operating activities for the fourth quarter of 2005 was $63.7 million, compared to $32.5 million for the fourth quarter of 2004 and $33.3 million for the third quarter of 2005. Cash provided by operating activities for fiscal 2005 was $163.0 million, compared to $147.6 million for fiscal 2004.

Subscriber acquisition cost² for the fourth quarter of 2005 was $40.65 per gross subscriber addition, compared to $34.64³ for the same period of 2004 and $35.69 for the third quarter of 2005. SAC for fiscal 2005 was $38.08 per gross subscriber addition compared to $35.39⁴ for fiscal 2004.

Churn⁵ for the fourth quarter of 2005 was 4.0 percent, compared to 4.4 percent for the fourth quarter of 2004 and 4.3 percent for the third quarter of 2005. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Subscribers. Netflix ended the fourth quarter of 2005 with approximately 4,179,000 total subscribers, representing 60 percent year-over-year growth from 2,610,000 total subscribers at the end of the fourth quarter of 2004 and 16 percent sequential growth from 3,592,000 subscribers at the end of the third quarter of 2005. Net subscriber additions in the quarter were 587,000, compared to 381,000 for the same period of 2004 and 396,000 for the third quarter of 2005.

During the quarter Netflix acquired 1,156,000 gross subscriber additions, representing 48 percent year-over-year growth from 783,000 gross subscriber additions acquired in the fourth quarter of 2004 and 26 percent quarter-over-quarter growth from 921,000 gross subscriber additions acquired in the third quarter of 2005.

Of the 4,179,000 total subscribers at quarter end, 96 percent, or 4,026,000, were paid subscribers. The other 4 percent, or 153,000, were free subscribers. Paid subscribers represented 95 percent of total subscribers at the end of the fourth quarter of 2004 and the third quarter of 2005.