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NFLX-06.30.14-EX99.1


Exhibit 99.1
July 21, 2014

Fellow Shareholders,

Fifteen years after launching our subscription service, we have over fifty million members enjoying Netflix in over 40 countries. As we gain new members, we are investing to further improve our content and member experience, and to expand the global availability of our service. Our summary results and forecast are below:

 (in millions except per share data and Streaming Content Obligations)
Q2 '13
Q3 '13
Q4 '13
Q1 '14
Q2 '14
Q3 '14 Forecast
Total Streaming:
 
 
 
 
 
 
Revenue
$
837

$
884

$
962

$
1,066

$
1,146

$
1,224

Contribution Profit
$
85

$
92

$
117

$
166

$
212

$
203

Contribution Margin
10.2
 %
10.4
 %
12.2
 %
15.6
 %
18.5
 %
16.6
 %
Paid Members
35.63

38.01

41.43

46.14

47.99

50.89

Total Members
37.56

40.28

44.35

48.35

50.05

53.74

Net Additions
1.24

2.73

4.07

4.00

1.69

3.69

 
 
 
 
 
 
 
Domestic Streaming:
 
 
 
 
 
 
Revenue
$
671

$
701

$
741

$
799

$
838

$
877

Contribution Profit
$
151

$
166

$
174

$
201

$
227

$
245

Contribution Margin
22.5
 %
23.7
 %
23.4
 %
25.2
 %
27.1
 %
27.9
 %
Paid Members
28.62

29.93

31.71

34.38

35.09

36.52

Total Members
29.81

31.09

33.42

35.67

36.24

37.58

Net Additions
0.63

1.29

2.33

2.25

0.57

1.33

 
 
 
 
 
 
 
International Streaming:
 
 
 
 
 
 
Revenue
$
166

$
183

$
221

$
267

$
307

$
347

Contribution Profit (Loss)
$
(66
)
$
(74
)
$
(57
)
$
(35
)
$
(15
)
$
(42
)
Contribution Margin
-39.7
 %
-40.6
 %
-25.9
 %
-13.1
 %
-5.0
 %
-12.1
 %
Paid Members
7.01

8.08

9.72

11.76

12.91

14.37

Total Members
7.75

9.19

10.93

12.68

13.80

16.16

Net Additions
0.61

1.44

1.74

1.75

1.12

2.36

 
 
 
 
 
 
 
Total (including DVD):
 
 
 
 
 
 
Operating Income
$
57

$
57

$
82

$
98

$
130

$
103

Net Income
$
29

$
32

$
48

$
53

$
71

$
55

EPS
$
0.49

$
0.52

$
0.79

$
0.86

$
1.15

$
0.89

 
 
 
 
 
 
 
Free Cash Flow
$
13

$
7

$
5

$
8

$
16

 
Shares (FD)
60.6

61.0

61.3

61.5

61.6

 
Streaming Content Obligations* ($B)
$
6.4

$
6.5

$
7.3

$
7.1

$
7.7

 
*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

Financial Performance

Our U.S. member base grew to more than 36 million on the strength of our ever-improving content offering, including Orange is the New Black Season 2. For Q3, we expect about 1.3 million net additions, comparable to Q3’13 in which we premiered Orange Season 1. We are pleased our net additions in the U.S. remain on par with last year.
 
Our U.S. contribution margin expanded 460 bps y/y to 27.1%, as revenue continued to grow faster than spending on content and marketing. As previously mentioned, we’ll re-evaluate our current 400 bps y/y margin improvement target once we achieve a 30% contribution margin sometime next year. The three models we are evaluating are 400, 200, and 100 basis points margin improvement per year over the next few years.

Outside the U.S., we generated continued growth in all of our markets. We ended Q2 with 13.8 million international members, growing 78% y/y. In September, we’ll be launching Netflix in Germany, France, Austria, Switzerland, Belgium, and Luxembourg. This launch into markets with over 60 million broadband households will significantly increase our European presence and raise our current international addressable market to over 180 million broadband households, or 2x the number of current U.S. broadband households.

Our international contribution loss of ($15.3) million has been rapidly approaching contribution profitability as we see improvements across all existing markets. Our broad success from Argentina to Finland has convinced us to further invest aggressively in global expansion. Our European expansion this quarter will add new expenses to the segment, so we expect a consolidated contribution loss of ($42) million for the international segment in Q3. Even after our upcoming expansion in Europe, we’ll only address about one-third (271 million of 728 million1) of current global broadband households, providing a great opportunity to build on our international success beyond 2014. As explained in our Long Term Letter2, our plan remains to run at about global break-even to fund investment in global expansion.

In May, we raised prices modestly in most of our markets for new members on our two screens at-a-time HD plan, and introduced a one screen at-a-time, standard definition plan across our markets. Our two screen HD plan continues to be the most popular plan choice for new members. We expect ARPU to rise slowly as members at the new prices grow as a percentage of total membership. There was minimal impact on membership growth from this price change.










______________________
1SNL Kagan
2http://ir.netflix.com/long-term-view.cfm

 
                                                                                                                                       2


Content

Original Series
 
The release of Orange is the New Black Season 2 has been every bit the global media event we had hoped for; critically acclaimed and embraced by a fervent and growing fan base. In its first month, Orange became the most watched series in every Netflix territory, with many members either watching for the first time or re-watching Season 1, in addition to the 13 new episodes of Season 2.

Earlier this month, Netflix original series and documentaries received 31 Emmy nominations, more than double the 14 we received in our first year of releasing original programming. In its first year of eligibility, Orange received 12 nominations, more than any other comedy series, while nominations for House of Cards grew from 9 last year to 13 this year. Notably, these two shows were nominated for Outstanding Comedy Series and Outstanding Drama Series while The Square, which received 4 nominations, is up for Outstanding Documentary. It is quite rare for a single network to receive nominations in all three of these categories as well as Outstanding Lead Actor and Outstanding Lead Actress for both drama (Kevin Spacey and Robin Wright for House of Cards) and comedy (Ricky Gervais for Derek and Taylor Schilling for Orange.)

Hemlock Grove3 debuted July 11 and has already begun to build on its Season 1 audience. We have been very pleased with the second season of Derek that launched in May and with the launch of our latest original documentary The Battered Bastards of Baseball4.

In the coming weeks, we will premiere the all new 4th and final season of The Killing5 (8/1) and a new adult animated comedy BoJack Horseman6 (8/22). Also in August, we will release Mission Blue (8/15) from the Oscar-winning director of The Cove, Fisher Stevens.

Reflecting the increasingly global nature of the Netflix service, we now have original series in production around the world, involving some of the best storytellers working in television and film today. Marco Polo, a historical adventure from Executive Producer Harvey Weinstein, is shooting in Kazakhstan and Malaysia. In New York there is Marvel’s Daredevil, the first of our original series from Marvel Television, as well as the already eagerly-anticipated third season of Orange is the New Black; while in Baltimore, production is underway on the third season of House of Cards. In the Florida Keys, the creators of Damages (Glenn Kessler, Daniel Zelman, and Todd Kessler) are shooting a dark family thriller with an ensemble cast led by Kyle Chandler, Sissy Spacek, Sam Shepard, Linda Cardellini, Ben Mendelsohn, and Norbert Leo Butz. Sense8, a mind-bending series from the Wachowskis (The Matrix trilogy, Cloud Atlas) and J. Michael Straczynski (Babylon 5), began production in San Francisco last month, is now in Chicago, and will shoot in many international locations this year.

In August, production begins in Los Angeles on Grace and Frankie, a comedy led by Jane Fonda, Lily Tomlin, Martin Sheen and Sam Waterston; and in Colombia, Brazilian director José Padilha (Elite Squad, Robocop) will begin filming Narcos with an all-star international cast led by Wagner Moura.

______________________
3https://www.youtube.com/watch?v=A3m56kalm7Y&list=PLvahqwMqN4M3SI7WgoI9t58DtrkjLgP8R
4https://www.youtube.com/watch?v=RA76b5Hhvxg&list=UUWOA1ZGywLbqmigxE4Qlvuw
5https://www.youtube.com/watch?v=oU7clobUQmQ&list=PLvahqwMqN4M1uQ5JITdkmNrxZnwtUG-DP
6https://www.youtube.com/watch?v=QxIXxrUQKYw&list=PLvahqwMqN4M1uQ5JITdkmNrxZnwtUG-DP

 
                                                                                                                                       3



During the quarter, we announced our first-ever talk show, hosted by Chelsea Handler, the popular comedian and best-selling author. As with scripted programming, but unlike news or sports, fewer people are watching talk shows live and are instead watching stacked episodes on DVR or online in the days and weeks following initial airing. Our intent is to produce a show with Handler and her team that reflects this shift to on-demand enjoyment and that will appeal to a global audience. Handler recently taped her first special for Netflix -- a stand-up show that’s been sold out across the U.S., the U.K. and Ireland -- and will produce four more in 2015 before we launch the talk show in early 2016.

Marketing

In Q2 we focused our marketing on the launch of the second season of Orange is the New Black in each of our markets. This campaign represents our largest content marketing push to date and we are pleased with the reaction from fans. Social media sentiment was overwhelmingly positive and search volume7 validated that we had a big hit on our hands. Season 3 next year should be even bigger.

Our Netflix brand advertising continues to resonate with consumers, highlighting the fun ways people’s lives are enriched when they watch something great. Our well-received You’ve Got to Get it To Get It campaign in Canada was extended with three new ads “Airport”8, “Test Results”9, and “Proposal”10 this quarter. We ran the first ad in the campaign, “Pep Talk”11, during the NHL playoffs and were delighted when New York Rangers head coach Alain Vigneault picked up the joke12 during a pre-game press conference, leading the NHL Network to interview13 the coach from our ad.

Another successful example of our brand advertising is our Viva Netflix campaign in Mexico which began with “Abuelita,”14 featuring a fun take on local family viewing habits, quickly followed by “Oribe”15 in which Mexico’s star striker returns home from the World Cup slightly earlier than his spouse expected.

In Q2 we updated our logo from the red block with white letters to the cleaner red letters. We were pleased to execute this transition with the minimum of distraction.

In-Store Gift Cards Coming This Fall

We are introducing physical gift cards in select stores in the U.S., Canada, Mexico, and Germany starting later this year. In mature markets, gift cards will extend our brand presence and make it easier to access Netflix. In newer markets, gift cards help build the brand and provide an easier alternative for consumers to join Netflix in markets with developing online payments.

______________________
7http://www.google.com/trends/topcharts#vm=chart&cid=tv_shows&geo=US&date=201406&cat
8http://www.youtube.com/watch?v=lM4KF9uiGhk&list=UUWOA1ZGywLbqmigxE4Qlvuw
9http://www.youtube.com/watch?v=X-c-9AxeBs8&list=UUWOA1ZGywLbqmigxE4Qlvuw
10http://www.youtube.com/watch?v=rBCdIZhMzKk&list=UUWOA1ZGywLbqmigxE4Qlvuw
11https://www.youtube.com/watch?v=ZDLY5zEs8ak
12http://www.si.com/nhl/home-ice/2014/06/11/alain-vigneault-looks-to-netflix-for-inspiration-in-stanley-cup-final-game-4
13http://video.nhl.com/videocenter/console?id=625004
14http://www.youtube.com/watch?v=SFg4JJjwvRI&feature=youtu.be&list=UUWOA1ZGywLbqmigxE4Qlvuw
15http://www.youtube.com/watch?v=pW3brlaKxH0

 
                                                                                                                                       4


Product

MVPD Set-Top Boxes

The Netflix app on Virgin Media set-top boxes in the U.K. continues to be a compelling streaming experience that delivers above-median viewing and satisfaction. We continue to gain traction in our international markets with set-top box integration and, in the U.S., launched the Netflix app on the TiVo platform with several regional MVPDs including Suddenlink, RCN, Grande and Atlantic Broadband during the quarter. MVPDs would rather their customers' use Netflix on their set-top and remote than use Netflix on Internet set-tops such as Apple TV, partially because that drives the pay-per-view consumption for the respective set-top owner.

Android TV Platform

The Netflix app for Google's Android TV platform will appear on TVs from Sony, Sharp, and others in the coming months. Widespread adoption of Android TV can reduce the number of different platforms we need to support to ensure Netflix is broadly available on Smart TVs delivering a consistently first-rate experience, no matter the vendor. Android TV incorporates Google's "cast" feature, allowing content discovery on mobile devices and laptops with streaming delivered to the big screen.

Smart TV growing in Latin America

Post World Cup, the number of Smart TVs used for Netflix viewing in Latin American countries is at a new high; in fact, the percentage of viewing from Smart TVs in Latin America is higher than any other region we serve. Members accessing Netflix on a big screen generally watch more and retain better than members using smaller devices.

UHD 4K Video Quality

We are now streaming flagship content in UHD 4K to members with 4K Smart TVs, putting Netflix at the leading edge of high-quality AV delivery. Already, Samsung, LG, and Sony have in retail around the world 4K Smart TVs, and House of Cards Season 2 and all seasons of Breaking Bad are now available for streaming in the new format. Content available to stream in 4K will grow steadily as several of our original series are or will be shooting in 4K, including Marco Polo, Sense8, and Narcos. UHD 4K will be an Internet-centric format as linear TV will be late to switch their networks to UHD 4K.

Strong Net Neutrality

Our focus on strong net neutrality, including interconnection, is about preventing large ISPs from holding our joint customers hostage with poor performance to extract payments from us, other Internet content firms, and Internet transit suppliers such as Level 3 and Cogent.

Our policy goals are for the FCC to not sanctify paid prioritization, and for the DOJ/FCC to block the merger of Comcast/TWC, or at the very least, to require as condition to approving the merger that the combined entity be prevented from charging for interconnection.


 
                                                                                                                                       5

6.3 Million U.S. DVD Memberships

Our DVD-by-mail business continues to satisfy 6.3 million members. Contribution profit for the segment was $92.8 million in the quarter, as expected, and we anticipate $90 million for Q3. A year ago in Q2, we lost 475k DVD memberships. In Q2 this year it was only 391k. DVD and Blu-ray offer amazing and comprehensive selection that keeps a core membership uniquely satisfied.


Reference
For quick reference, our eight most recent investor letters are here: April 201416, January 201417, October 201318, July 201319, April 201320, January 201321, October 201222, July 201223.
























________________________
16http://files.shareholder.com/downloads/NFLX/3337146746x0x745654/fb5aaae0-b991-4e76-863c-3b859c8dece8/Q114%20Earnings%20Letter%204.21.14%20final.pdf
17http://files.shareholder.com/downloads/NFLX/3337146746x0x720306/119321bc-89c3-4306-93ac-93c02da2354f/Q4%2013%20Letter%20to%20shareholders.pdf
18http://files.shareholder.com/downloads/NFLX/2531040512x0x698481/ecfe1ab4-66f5-4e23-a64a-1ca025216e5e/Q313%20Earnings%20Letter%2010.21.13%2010.30am.pdf
19http://files.shareholder.com/downloads/NFLX/2531040512x0x678215/a9076739-bc08-421e-8dba-52570f4e489e/Q213%20Investor%20Letter.pdf
20http://ir.netflix.com/common/download/download.cfm?companyid=NFLX&fileid=655293&filekey=5c1951a4-e79c-49c8-bb83-1595635bf934&filename=Investor_Letter_Q12013.pdf
21http://files.shareholder.com/downloads/NFLX/2531040512x0x630302/e7656660-df35-4384-9f39-cb0f39e54f0b/Investor%20Letter%20Q42012%2001.23.13.pdf
22http://files.shareholder.com/downloads/NFLX/2531040512x0x607614/6bc75664-8a60-4398-8e52-fe918b79bf67/Investor%20Letter%20Q3%202012%2010.23.12.pdf
23http://files.shareholder.com/downloads/NFLX/2531040512x0x585175/818f7f39-011e-4227-ba2f-7d30b8ad3d23/Investor%20Letter%20Q2%202012%2007.24.12.pdf


 
                                                                                                                                       6


Summary
We have a huge global opportunity ahead and a lot of challenges too. We are thrilled for the creators of our original series and documentaries who earned 31 Emmy nominations this year, and whose incredible work is being enjoyed by many of our 50 million members.




Sincerely,
 
Reed Hastings, CEO
David Wells, CFO
21st July 2014 Earnings Interview
Reed Hastings, David Wells and Ted Sarandos will participate in a live video interview at 2 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


 
                                                                                                                                       7


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; marketing; gift cards; device and platform integration; member growth domestically and internationally, including net, total and paid; revenue, average revenue per subscriber, 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.






 
                                                                                                                                       8


Netflix, Inc.
Consolidated Statements of Operations
(unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2014
 
March 31,
 2014
 
June 30,
 2013 (1)
 
June 30,
2014
 
June 30,
2013 (1)
Revenues
$
1,340,407

 
$
1,270,089

 
$
1,069,372

 
$
2,610,496

 
$
2,093,333

Cost of revenues
914,848

 
869,186

 
760,674

 
1,784,034

 
1,497,626

Marketing
120,763

 
137,098

 
114,611

 
257,861

 
233,697

Technology and development
115,182

 
110,310

 
93,126

 
225,492

 
185,101

General and administrative
60,014

 
55,900

 
43,844

 
115,914

 
87,970

Operating income
129,600

 
97,595

 
57,117

 
227,195

 
88,939

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(13,328
)
 
(10,052
)
 
(7,528
)
 
(23,380
)
 
(14,268
)
Interest and other income (expense)
1,100

 
1,401

 
(2,940
)
 
2,501

 
(1,963
)
Loss on extinguishment of debt
—

 
—

 
—

 
—

 
(25,129
)
Income before income taxes
117,372

 
88,944

 
46,649

 
206,316

 
47,579

Provision for income taxes
46,354

 
35,829

 
17,178

 
82,183

 
15,419

Net income
$
71,018

 
$
53,115

 
$
29,471

 
$
124,133

 
$
32,160

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
1.18

 
$
0.89

 
$
0.51

 
$
2.07

 
$
0.56

Diluted
$
1.15

 
$
0.86

 
$
0.49

 
$
2.02

 
$
0.53

Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
59,996

 
59,817

 
58,192

 
59,907

 
57,089

Diluted
61,634

 
61,548

 
60,590

 
61,592

 
60,369

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





 
                                                                                                                                       9



Netflix, Inc.
Consolidated Balance Sheets
(unaudited)
(in thousands, except share and par value data)
 
 
As of
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,214,244

 
$
604,965

Short-term investments
500,121

 
595,440

Current content library, net
1,786,341

 
1,706,421

Other current assets
167,674

 
151,937

Total current assets
3,668,380

 
3,058,763

Non-current content library, net
2,348,796

 
2,091,071

Property and equipment, net
141,715

 
133,605

Other non-current assets
166,931

 
129,124

Total assets
$
6,325,822

 
$
5,412,563

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Current content liabilities
$
1,858,020

 
$
1,775,983

Accounts payable
137,226

 
108,435

Accrued expenses
98,548

 
54,018

Deferred revenue
241,330

 
215,767

Total current liabilities
2,335,124

 
2,154,203

Non-current content liabilities
1,390,770

 
1,345,590

Long-term debt
900,000

 
500,000

Other non-current liabilities
90,223

 
79,209

Total liabilities
4,716,117

 
4,079,002

Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 160,000,000 shares authorized at June 30 2014 and December 31, 2013; 60,091,015 and 59,607,001 issued and outstanding at June 30, 2014 and December 31, 2013, respectively
60

 
60

Additional paid-in capital
926,525

 
777,441

Accumulated other comprehensive income
6,502

 
3,575

Retained earnings
676,618

 
552,485

Total stockholders' equity
1,609,705

 
1,333,561

Total liabilities and stockholders' equity
$
6,325,822

 
$
5,412,563

 

 
                                                                                                                                       10


Netflix, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net income
$
71,018

 
$
53,115

 
$
29,471

 
$
124,133

 
$
32,160

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
Additions to streaming content library
(813,314
)
 
(749,399
)
 
(593,454
)
 
(1,562,713
)
 
(1,185,395
)
Change in streaming content liabilities
78,359

 
42,244

 
7,284

 
120,603

 
16,984

Amortization of streaming content library
639,037

 
600,735

 
510,250

 
1,239,772

 
995,990

Amortization of DVD content library
16,923

 
16,121

 
17,709

 
33,044

 
35,946

Depreciation and amortization of property, equipment and intangibles
12,977

 
12,382

 
12,026

 
25,359

 
24,077

Stock-based compensation expense
29,285

 
25,825

 
17,955

 
55,110

 
35,701

Excess tax benefits from stock-based compensation
(14,628
)
 
(32,732
)
 
(20,368
)
 
(47,360
)
 
(31,983
)
Other non-cash items
3,251

 
2,196

 
1,188

 
5,447

 
2,938

Loss on extinguishment of debt
—

 
—

 
—

 
—

 
25,129

Deferred taxes
(16,569
)
 
(13,103
)
 
(2,040
)
 
(29,672
)
 
(8,788
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
Other current assets
(20,685
)
 
35,066

 
33,762

 
14,381

 
28,035

Accounts payable
(3,086
)
 
22,812

 
(5,138
)
 
19,726

 
11,881

Accrued expenses
59,008

 
(442
)
 
10,494

 
58,566

 
6,362

Deferred revenue
11,315

 
14,248

 
7,693

 
25,563

 
17,099

Other non-current assets and liabilities
3,133

 
7,291

 
7,111

 
10,424

 
15,557

Net cash provided by operating activities
56,024

 
36,359

 
33,943

 
92,383

 
21,693

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Acquisition of DVD content library
(20,981
)
 
(14,914
)
 
(14,023
)
 
(35,895
)
 
(35,216
)
Purchases of property and equipment
(19,869
)
 
(13,334
)
 
(8,088
)
 
(33,203
)
 
(20,206
)
Other assets
1,129

 
295

 
1,087

 
1,424

 
5,137

Purchases of short-term investments
(170,908
)
 
(60,546
)
 
(146,050
)
 
(231,454
)
 
(381,673
)
Proceeds from sale of short-term investments
89,662

 
143,048

 
33,979

 
232,710

 
115,207

Proceeds from maturities of short-term investments
92,014

 
3,090

 
5,410

 
95,104

 
9,830

Net cash (used in) provided by investing activities
(28,953
)
 
57,639

 
(127,685
)
 
28,686

 
(306,921
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
14,469

 
32,448

 
28,846

 
46,917

 
67,992

Proceeds from issuance of debt
—

 
400,000

 
—

 
400,000

 
500,000

Issuance costs
(353
)
 
(6,727
)
 
—

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

 
—

 
—

 
—

 
(219,362
)
Excess tax benefits from stock-based compensation
14,628

 
32,732

 
20,368

 
47,360

 
31,983

Principal payments of lease financing obligations
(271
)
 
(267
)
 
(255
)
 
(538
)
 
(658
)
Net cash provided by financing activities
28,473

 
458,186

 
48,959

 
486,659

 
370,541

 Effect of exchange rate changes on cash and cash equivalents
1,250

 
301

 
(2,590
)
 
1,551

 
(4,926
)
 Net increase (decrease) in cash and cash equivalents
56,794

 
552,485

 
(47,373
)
 
609,279

 
80,387

 Cash and cash equivalents, beginning of period
1,157,450

 
604,965

 
418,051

 
604,965

 
290,291

 Cash and cash equivalents, end of period
$
1,214,244

 
$
1,157,450

 
$
370,678

 
$
1,214,244

 
$
370,678

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
2013
 
June 30,
2014
 
June 30,
2013
Non-GAAP free cash flow reconciliation:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
56,024

 
$
36,359

 
$
33,943

 
$
92,383

 
$
21,693

Acquisition of DVD content library
(20,981
)
 
(14,914
)
 
(14,023
)
 
(35,895
)
 
(35,216
)
Purchases of property and equipment
(19,869
)
 
(13,334
)
 
(8,088
)
 
(33,203
)
 
(20,206
)
Other assets
1,129

 
295

 
1,087

 
1,424

 
5,137

Non-GAAP free cash flow
$
16,303

 
$
8,406

 
$
12,919

 
$
24,709

 
$
(28,592
)

 
                                                                                                                                       11


Netflix, Inc.
Segment Information
(unaudited)
(in thousands)
 
As of / Three Months Ended
 
As of/ Six Months Ended
 
June 30,
2014
 
March 31,
2014
 
June 30,
 2013 (1)
 
June 30,
2014
 
June 30,
2013 (1)
Domestic Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
36,244

 
35,674

 
29,807

 
36,244

 
29,807

Paid members at end of period
35,085

 
34,377

 
28,624

 
35,085

 
28,624

 
 
 
 
 
 
 
 
 
 
Revenues
$
838,225

 
$
798,617

 
$
671,089

 
$
1,636,842

 
$
1,309,738

Cost of revenues
546,223

 
517,094

 
452,598

 
1,063,317

 
892,932

Marketing
64,727

 
80,258

 
67,177

 
144,985

 
134,142

Contribution profit
227,275

 
201,265

 
151,314

 
428,540

 
282,664

 
 
 
 
 
 
 
 
 
 
International Streaming
 
 
 
 
 
 
 
 
 
Total members at end of period
13,801

 
12,683

 
7,747

 
13,801

 
7,747

Paid members at end of period
12,907

 
11,755

 
7,014

 
12,907

 
7,014

 
 
 
 
 
 
 
 
 
 
Revenues
$
307,461

 
$
267,118

 
$
165,902

 
$
574,579

 
$
307,921

Cost of revenues
266,697

 
245,267

 
184,400

 
511,964

 
351,292

Marketing
56,036

 
56,840

 
47,335

 
112,876

 
99,382

Contribution profit (loss)
(15,272
)
 
(34,989
)
 
(65,833
)
 
(50,261
)
 
(142,753
)
 
 
 
 
 
 
 
 
 
 
Domestic DVD
 
 
 
 
 
 
 
 
 
Total members at end of period
6,261

 
6,652

 
7,508

 
6,261

 
7,508

Paid members at end of period
6,167

 
6,509

 
7,369

 
6,167

 
7,369

 
 
 
 
 
 
 
 
 
 
Revenues
$
194,721

 
$
204,354

 
$
232,381

 
$
399,075

 
$
475,674

Cost of revenues
101,928

 
106,825

 
123,676

 
208,753

 
253,402

Marketing
—

 
—

 
99

 
—

 
173

Contribution profit
92,793

 
97,529

 
108,606

 
190,322

 
222,099

 
 
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
1,340,407

 
$
1,270,089

 
$
1,069,372

 
$
2,610,496

 
$
2,093,333

Cost of revenues
914,848

 
869,186

 
760,674

 
1,784,034

 
1,497,626

Marketing
120,763

 
137,098

 
114,611

 
257,861

 
233,697

Contribution profit
304,796

 
263,805

 
194,087

 
568,601

 
362,010

Other operating expenses
175,196

 
166,210

 
136,970

 
341,406

 
273,071

Operating income
129,600

 
97,595

 
57,117

 
227,195

 
88,939

Other income (expense)
(12,228
)
 
(8,651
)
 
(10,468
)
 
(20,879
)
 
(16,231
)
Loss on extinguishment of debt
—

 
—

 
—

 
—

 
(25,129
)
Provision for income taxes
46,354

 
35,829

 
17,178

 
82,183

 
15,419

Net income
$
71,018

 
$
53,115

 
$
29,471

 
$
124,133

 
$
32,160


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


 
                                                                                                                                       12
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