Netflix (NFLX)

Fourth-Quarter and Fiscal-Year 2008 Financial Highlights

Subscribers. Netflix ended the fourth quarter of 2008 with approximately 9,390,000 total subscribers, representing 26 percent year-over-year growth from 7,479,000 total subscribers at the end of the fourth quarter of 2007 and 8 percent sequential growth from 8,672,000 subscribers at the end of the third quarter of 2008.

Net subscriber change in the quarter was an increase of 718,000 compared to an increase of 451,000 for the same period of 2007 and an increase of 261,000 for the third quarter of 2008.

Gross subscriber additions for the quarter totaled 2,085,000, representing 39 percent year-over-year growth from 1,495,000 gross subscriber additions in the fourth quarter of 2007 and 36 percent quarter-over-quarter growth from 1,528,000 gross subscriber additions in the third quarter of 2008.

Of the 9,390,000 total subscribers at quarter end, 98 percent, or 9,164,000, were paid subscribers. The other 2 percent, or 226,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the fourth quarter of 2007 and at the end of the third quarter of 2008.

Revenue for the fourth quarter of 2008 was $359.6 million, representing 19 percent year-over-year growth from $302.4 million for the fourth quarter of 2007, and a 5 percent sequential increase from $341.3 million for the third quarter of 2008. Revenue for fiscal 2008 was $1.365 billion, up 13 percent from $1.205 billion for fiscal 2007.

Gross margin¹ for the fourth quarter of 2008 was 35.2 percent compared to 33.8 percent for the fourth quarter of 2007 and 34.2 percent for the third quarter of 2008. Gross margin for fiscal 2008 was 33.3 percent compared to 34.8 percent for fiscal 2007.

GAAP net income for the fourth quarter of 2008 was $22.7 million, or $0.38 per diluted share compared to GAAP net income of $15.7 million, or $0.23 per diluted share, for the fourth quarter of 2007 and GAAP net income of $20.4 million, or $0.33 per diluted share, for the third quarter of 2008. GAAP net income grew 45 percent on a year-over-year basis and GAAP EPS grew 65 percent on a year-over-year basis.

GAAP net income for fiscal 2008 was $83.0 million, or $1.32 per diluted share compared to GAAP net income of $66.6 million, or $0.97 per diluted share, for fiscal 2007. GAAP net income grew 25 percent on a year-over-year basis and GAAP EPS grew 36 percent on a year-over-year basis.

Non-GAAP net income was $24.6 million, or $0.41 per diluted share, for the fourth quarter of 2008 compared to non-GAAP net income of $17.7 million, or $0.26 per diluted share, for the fourth quarter of 2007 and non-GAAP net income of $22.1 million, or $0.36 per diluted share, for the third quarter of 2008. Non-GAAP net income grew 39 percent on a year-over-year basis and non-GAAP EPS grew 58 percent on a year-over-year basis.

Non-GAAP net income was $90.7 million, or $1.44 per diluted share, for fiscal 2008 compared to non-GAAP net income of $73.8 million, or $1.07 per diluted share, for fiscal 2007. Non-GAAP net income grew 23 percent on a year-over-year basis and non-GAAP EPS grew 35 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 was $3.2 million for the fourth quarter of 2008 and the fourth quarter of 2007 and $3.0 million for the third quarter of 2008. Stock-based compensation for fiscal 2008 was $12.3 million compared to $12.0 million for fiscal 2007. 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 cost² for the fourth quarter of 2008 was $26.67 per gross subscriber addition compared to $34.58 for the same period of 2007 and $32.21 for the third quarter of 2008. SAC for fiscal 2008 was $29.12 per gross subscriber addition compared to $40.86 for fiscal 2007.

Churn³ for the fourth quarter of 2008 was 4.2 percent compared to 4.1 percent for the fourth quarter of 2007 and 4.2 percent for the third 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 flow⁴ for the fourth quarter of 2008 was $51.0 million compared to $21.1 million in the fourth quarter of 2007 and $26.2 million for the third quarter of 2008. Free cash flow for fiscal 2008 was $94.7 million compared to $45.9 million in fiscal 2007.

2

Cash provided by operating activities for the fourth quarter of 2008 was $92.1 million compared to $87.6 million for the fourth quarter of 2007 and $60.5 million for the third quarter of 2008. Cash provided by operating activities for fiscal 2008 was $284.0 million compared to $277.4 million for fiscal 2007.