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NFLX » Topics » Stock-Based Compensation

These excerpts taken from the NFLX 10-K filed Feb 25, 2009.

Stock-Based Compensation

We adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation cost is estimated at the grant date based on 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 changed our method of calculating the fair value of new stock-based compensation awards under our stock plans from a Black-Scholes model to a lattice-binomial model on January 1, 2007. We continue to use a Black-Scholes option model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 

  •  

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.

 

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  •  

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.

We grant stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R) is fully recognized on the grant date and no estimate is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R).

Stock-Based Compensation

We adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation cost is estimated at the grant date based on 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 changed our method of calculating the fair value of new stock-based compensation awards under our stock plans from a Black-Scholes model to a lattice-binomial model on January 1, 2007. We continue to use a Black-Scholes option model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 

  •  

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.

 

28

Table of Contents
  •  

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.

We grant stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R) is fully recognized on the grant date and no estimate is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R).

Stock-Based Compensation

FACE="Times New Roman" SIZE="2">We adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation
cost is estimated at the grant date based on 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We changed our method of calculating the fair value of new stock-based compensation awards under our stock plans from a Black-Scholes model to a
lattice-binomial model on January 1, 2007. We continue to use a Black-Scholes option model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted
subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 







 • 

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.

STYLE="margin-top:0px;margin-bottom:0px"> 


28






Table of Contents








 • 

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.

We grant
stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R)
is fully recognized on the grant date and no estimate is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R).

STYLE="margin-top:18px;margin-bottom:0px">Income Taxes

We record a tax provision for
the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying the enacted tax rates applicable to future years to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">As of December 31, 2008, our deferred tax asset balance was $28.0 million. As of December 31, 2007, our deferred tax asset balance was $19.1
million. There was no valuation allowance as of December 31, 2008 or 2007.

During 2007, we adopted the Financial Accounting Standard
Board’s (“FASB”) Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 changes the accounting for
uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present and disclose uncertain tax positions in their financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax
position 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. We recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 8 to the consolidated
financial statements for further information regarding income taxes.

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 market growth, forecasted 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. We believe that the 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.

Stock-Based Compensation

FACE="Times New Roman" SIZE="2">We adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation
cost is estimated at the grant date based on 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We changed our method of calculating the fair value of new stock-based compensation awards under our stock plans from a Black-Scholes model to a
lattice-binomial model on January 1, 2007. We continue to use a Black-Scholes option model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted
subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 







 • 

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.

STYLE="margin-top:0px;margin-bottom:0px"> 


28






Table of Contents








 • 

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.

We grant
stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R)
is fully recognized on the grant date and no estimate is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R).

STYLE="margin-top:18px;margin-bottom:0px">Income Taxes

We record a tax provision for
the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying the enacted tax rates applicable to future years to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">As of December 31, 2008, our deferred tax asset balance was $28.0 million. As of December 31, 2007, our deferred tax asset balance was $19.1
million. There was no valuation allowance as of December 31, 2008 or 2007.

During 2007, we adopted the Financial Accounting Standard
Board’s (“FASB”) Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 changes the accounting for
uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present and disclose uncertain tax positions in their financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax
position 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. We recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 8 to the consolidated
financial statements for further information regarding income taxes.

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 market growth, forecasted 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. We believe that the 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.

Stock-Based Compensation

FACE="Times New Roman" SIZE="2">We adopted the provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation
cost is estimated at the grant date based on 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We changed our method of calculating the fair value of new stock-based compensation awards under our stock plans from a Black-Scholes model to a
lattice-binomial model on January 1, 2007. We continue to use a Black-Scholes option model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted
subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 







 • 

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.

STYLE="margin-top:0px;margin-bottom:0px"> 


28






Table of Contents








 • 

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.

We grant
stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R)
is fully recognized on the grant date and no estimate is required for post-vesting option forfeitures. See Note 7 to the consolidated financial statements for further information regarding SFAS No. 123(R).

STYLE="margin-top:18px;margin-bottom:0px">Income Taxes

We record a tax provision for
the anticipated tax consequences of our reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying the enacted tax rates applicable to future years to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and 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.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">As of December 31, 2008, our deferred tax asset balance was $28.0 million. As of December 31, 2007, our deferred tax asset balance was $19.1
million. There was no valuation allowance as of December 31, 2008 or 2007.

During 2007, we adopted the Financial Accounting Standard
Board’s (“FASB”) Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 changes the accounting for
uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present and disclose uncertain tax positions in their financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax
position 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. We recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 8 to the consolidated
financial statements for further information regarding income taxes.

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 market growth, forecasted 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. We believe that the 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.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS 123 and SFAS 123R were generally consistent, the adoption of SFAS 123R did not have a significant impact on the Company’s financial position or results of operations.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123R”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS 123 and SFAS 123R were generally consistent, the adoption of SFAS 123R did not have a significant impact on the Company’s financial position or results of operations.

Stock-Based Compensation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
123R”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS
No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS 123 and
SFAS 123R were generally consistent, the adoption of SFAS 123R did not have a significant impact on the Company’s financial position or results of operations.

SIZE="2">Recent Accounting Pronouncements

In April 2008, the FASB issued FASB Staff Position (“FSP”)
No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of
recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the
adoption of this standard to have a material effect on its financial position or results of operations.

In December 2007, the FASB issued
SFAS No. 141-R, Business Combinations (“SFAS 141-R”) and SFAS No. 160 Non-controlling Interests in Consolidated Financial Statement, an amendment of Accounting Research Bulletin No. 5 (“SFAS 160”).
SFAS 141-R requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other
businesses. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. These statements are effective for the Company in the first
quarter of fiscal 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

FACE="Times New Roman" SIZE="2">In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 was effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB issued proposed FSP No. 157-2 (FSP 157-2), which would delay the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP No. 157-2 partially defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP 157-2. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. We do not expect the adoption of SFAS 157 for
non-financial assets and non-financial liabilities to have a material effect on our financial position or results of operations.

 


F-13






Table of Contents



NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 


Stock-Based Compensation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
123R”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS
No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS 123 and
SFAS 123R were generally consistent, the adoption of SFAS 123R did not have a significant impact on the Company’s financial position or results of operations.

SIZE="2">Recent Accounting Pronouncements

In April 2008, the FASB issued FASB Staff Position (“FSP”)
No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of
recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the
adoption of this standard to have a material effect on its financial position or results of operations.

In December 2007, the FASB issued
SFAS No. 141-R, Business Combinations (“SFAS 141-R”) and SFAS No. 160 Non-controlling Interests in Consolidated Financial Statement, an amendment of Accounting Research Bulletin No. 5 (“SFAS 160”).
SFAS 141-R requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other
businesses. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. These statements are effective for the Company in the first
quarter of fiscal 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

FACE="Times New Roman" SIZE="2">In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 was effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB issued proposed FSP No. 157-2 (FSP 157-2), which would delay the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP No. 157-2 partially defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP 157-2. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. We do not expect the adoption of SFAS 157 for
non-financial assets and non-financial liabilities to have a material effect on our financial position or results of operations.

 


F-13






Table of Contents



NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 


Stock-Based Compensation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
123R”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), as amended by SFAS
No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS 123 and
SFAS 123R were generally consistent, the adoption of SFAS 123R did not have a significant impact on the Company’s financial position or results of operations.

SIZE="2">Recent Accounting Pronouncements

In April 2008, the FASB issued FASB Staff Position (“FSP”)
No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of
recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in
business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company does not expect the
adoption of this standard to have a material effect on its financial position or results of operations.

In December 2007, the FASB issued
SFAS No. 141-R, Business Combinations (“SFAS 141-R”) and SFAS No. 160 Non-controlling Interests in Consolidated Financial Statement, an amendment of Accounting Research Bulletin No. 5 (“SFAS 160”).
SFAS 141-R requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other
businesses. SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. These statements are effective for the Company in the first
quarter of fiscal 2009. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

FACE="Times New Roman" SIZE="2">In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 establishes a framework for measuring the fair value of assets and liabilities. This
framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS 157 was effective for
fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In December 2007, the FASB issued proposed FSP No. 157-2 (FSP 157-2), which would delay the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP No. 157-2 partially defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP 157-2. Effective January 1, 2008, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a
recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. We do not expect the adoption of SFAS 157 for
non-financial assets and non-financial liabilities to have a material effect on our financial position or results of operations.

 


F-13






Table of Contents



NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 


This excerpt taken from the NFLX 10-Q filed Nov 3, 2008.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Vested stock options granted before June 30, 2004 can be exercised up to three months following termination of employment. Vested stock options granted after June 30, 2004 and before January 1, 2007 can be exercised up to one year following termination of employment. Beginning in January 2007, newly-granted employee stock options can be exercised for the full ten year contractual term regardless of employment status. In conjunction with this change, the Company changed its method of calculating the fair value of new stock-based compensation awards granted under its stock option plans from a Black-Scholes model to a lattice-binomial model. See Note 6 to the condensed consolidated financial statements for further discussion.

This excerpt taken from the NFLX 10-Q filed Aug 11, 2008.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment. Upon the adoption of SFAS No. 123(R), the Company classified tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options as financing cash flows. See Note 6 to the condensed consolidated financial statements for further discussion.

This excerpt taken from the NFLX 10-Q filed May 6, 2008.

Stock-Based Compensation

Vested stock options granted before June 30, 2004 can be exercised up to three months following termination of employment. Vested stock options granted after June 30, 2004 and before January 1, 2007 can be exercised up to one year following termination of employment. Beginning in January 2007, newly-granted employee stock options will remain exercisable for the full ten year contractual term regardless of employment status. In conjunction with this change, the Company changed its method of calculating the fair value of new stock-based compensation awards granted under its stock option plans from a Black-Scholes model to a lattice-binomial model. The Company believes that the lattice-binomial model is more capable of incorporating the features of the Company’s employee stock options than closed-form models such as the Black-Scholes model. The lattice-binomial model has been applied prospectively starting with options granted in 2007. The following table summarizes the assumptions used to value option grants using the lattice-binomial model:

 

     Three Months Ended  
     March 31,
2008		     March 31,
2007		  

Dividend yield

    —       —    

Expected volatility

    54 %   43 %

Risk-free interest rate

    3.86 %   4.73 %

Suboptimal exercise factor

    1.77-2.04     1.77-2.09  

The Company estimates expected volatility based on a blend of historical volatility of the Company’s common stock and implied volatility of tradable forward call options to purchase shares of its common stock. The Company believes that implied volatility of publicly traded options in its common stock is expected to be more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of expected volatility than historical volatility of its common stock.

The Company bifurcates its option grants into two employee groupings (executive and non-executive) based on exercise behavior and considers several factors when determining the estimate of expected life for each group, including the historical option exercise behavior and the terms and vesting periods of the options granted. In the first quarter of 2008, the Company used a suboptimal exercise factor of 2.04 for executives and 1.77 for non-executives, which resulted in a calculated expected life of the option grants of four years for executives and three years for non-executives. In the first quarter of 2007, the Company used a suboptimal exercise factor of 2.09 for executives and 1.77 for non-executives, which resulted in a calculated expected life of five years for executives and four years for non-executives.

The Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company does not use a post-vesting termination rate as options are fully vested upon grant date.

The weighted-average fair value of employee stock options granted during the three months ended March 31, 2008 and 2007 was $12.39 and $10.68 per share, respectively.

The following table summarizes stock-based compensation expense, net of tax, related to stock option plans and employee stock purchases under SFAS No. 123(R) for the three months ended March 31, 2008 and 2007 which was allocated as follows:

 

     Three Months Ended  
     March 31,
2008		     March 31,
2007		  
     (in thousands)  

Fulfillment expenses

    $ 106     $ 146  

Technology and development

      996       757  

Marketing

      509       531  

General and administrative

      1,519       1,369  
                

Stock-based compensation expense before income taxes

      3,130       2,803  

Income tax benefit

      (1,277 )     (1,134 )
                

Stock-based compensation after income taxes

    $ 1,853     $ 1,669  
                

 

14

Table of Contents
These excerpts taken from the NFLX 10-K filed Feb 28, 2008.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS No. 123 and SFAS No. 123(R) were generally consistent, the adoption of SFAS No. 123(R) did not have a significant impact on the Company’s financial position or results of operations.

Stock-Based Compensation

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment (“SFAS
No. 123(R)”), using the modified prospective method. The Company had previously adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123”), as amended
by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123 in 2003, and restated prior periods at that time. Because the fair value recognition provisions of SFAS
No. 123 and SFAS No. 123(R) were generally consistent, the adoption of SFAS No. 123(R) did not have a significant impact on the Company’s financial position or results of operations.

STYLE="margin-top:18px;margin-bottom:0px; margin-left:2%; text-indent:-2%">Recent Accounting Pronouncements

FACE="Times New Roman" SIZE="2">In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141-R, Business Combinations (SFAS No. 141-R), to replace SFAS No. 141, Business Combinations.
SFAS No. 141-R requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more
other businesses. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The Company does not expect the adoption of this standard to have a material effect on its financial
position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 allows companies to choose to measure many financial instruments and certain other items at fair value. The statement requires that unrealized gains and losses on items for which the fair value option has
been elected to be reported in earnings. SFAS No. 159 also amends certain provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, although earlier adoption is permitted. The Company does not expect the adoption of this standard to have a material effect on its financial position or results of operations.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring
the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair
market value. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued
financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. In December 2007, the FASB issued proposed FASB Staff Position (“FSP”) No. 157-b (FSP No. 157-b), which
would delay the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP No. 157-b
partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP No. 157-b. The Company does not expect the adoption
of this standard to have a material effect on our financial position or results of operations.

In June 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes. The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income

 


F-12






Table of Contents



NETFLIX, INC.

FACE="Times New Roman" SIZE="2">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



Taxes. Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of
uncertain tax positions. The interpretation was effective for fiscal years beginning after December 15, 2006. The adoption of this standard did not have a material effect on our financial position or results of operations.

STYLE="margin-top:18px;margin-bottom:0px">2.    Short-term Investments

At
December 31, 2007, short-term investments were classified as available-for-sale securities and are reported at fair value as follows:

 




























































































































   Gross
Amortized
Cost		  Gross
Unrealized
Gains		  Gross
Unrealized
Losses		  Estimated
Fair Value
   (in thousands)

Corporate debt securities

  $36,445  $315  $(85) $36,675

Government and agency securities

   130,884   2,155   (33)  133,006

Asset and mortgage backed securities

   37,842   307   (127)  38,022
                
  $205,171  $2,777  $(245) $207,703
                

The Company recognized gross realized gains of $0.7 million and gross realized losses of $0.05
million during 2007 from the sales of available-for-sale securities. The Company recognized interest income related to available-for-sale securities of $9.6 million during 2007. Realized gains and losses and interest income are included in interest
and other income (expense).

The estimated fair value of short-term investments by contractual maturity as of December 31, 2007 is as
follows:

 
















































   (in thousands)

Due within one year

  $22,950

Due after one year and through 5 years

   165,695

Due after 5 years and through 10 years

   2,950

Due after 10 years

   16,108
    

Total short-term investments

  $207,703
    

As the portfolio has been in existence for less than one year as of December 31, 2007, there
are no investments which have been in a continuous loss position for more than twelve months.

This excerpt taken from the NFLX 10-Q filed Nov 2, 2007.

Stock-Based Compensation

We adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R) on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation cost is estimated at the grant date based on 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 adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123, in the second quarter of 2003 and restated prior periods at that time. Because the fair value recognition provisions of SFAS No. 123 and SFAS No. 123(R) were materially consistent under our equity plans, the adoption of SFAS No. 123(R) did not have a significant impact on our financial position or results of operations.

We changed our method of calculating the fair value of new stock-based compensation awards granted under our stock plans from a Black-Scholes model to a lattice-binomial model. We continue to use a Black-Scholes model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 

  •  

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.

 

  •  

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.

We grant stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R) is fully recognized upon the stock option grants and no estimate is required for pre-vesting option forfeitures.

See Note 6 to the condensed consolidated financial statements for further information regarding the SFAS No. 123(R) disclosures.

 

20

Table of Contents
This excerpt taken from the NFLX 10-Q filed Aug 6, 2007.

Stock-Based Compensation

We adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R) on January 1, 2006. Under the fair value recognition provisions of this statement, stock-based compensation cost is estimated at the grant date based on 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 adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123, in the second quarter of 2003 and restated prior periods at that time. Because the fair value recognition provisions of SFAS No. 123 and SFAS No. 123(R) were materially consistent under our equity plans, the adoption of SFAS No. 123(R) did not have a significant impact on our financial position or results of operations.

We changed our method of calculating the fair value of new stock-based compensation awards granted under our stock plans from a Black-Scholes model to a lattice-binomial model. We continue to use a Black-Scholes model to determine the fair value of employee stock purchase plan shares. The lattice-binomial model has been applied prospectively to options granted subsequent to January 1, 2007. The lattice-binomial model requires the input of highly subjective assumptions, including the option’s 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 materially impacted.

 

  •  

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.

 

17

Table of Contents
  •  

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.

We grant stock options to our employees on a monthly basis. We have elected to grant all options as non-qualified stock options which vest immediately. As a result of immediate vesting, stock-based compensation expense determined under SFAS No. 123(R) is fully recognized upon the stock option grants and no estimate is required for pre-vesting option forfeitures.

See Note 6 to the condensed consolidated financial statements for further information regarding the SFAS No. 123(R) disclosures.

EXCERPTS ON THIS PAGE:

10-K (10 sections)
Feb 25, 2009
10-Q
Nov 3, 2008
10-Q
Aug 11, 2008
10-Q
May 6, 2008
10-K (2 sections)
Feb 28, 2008
10-Q
Nov 2, 2007
10-Q
Aug 6, 2007

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