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| 1. | Organization and Summary of Significant Accounting Policies |
Description of Business
Netflix, Inc. (the "Company") was incorporated on August 29, 1997 and began operations on April 14, 1998. The Company is an Internet subscription service streaming TV shows and movies. The Company's subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices and in the United States, subscribers can receive DVDs delivered quickly to their homes.
The Company is organized into three operating segments, Domestic streaming, International streaming and Domestic DVD. Substantially all of the Company's revenues are generated in the United States, and all of the Company's long-lived tangible assets are held in the United States. The Company's revenues are derived from monthly subscription fees.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Reclassification
Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not impact any prior amounts of reported total assets, total liabilities, stockholders' equity, results of operations or cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the amortization policy of its content library; the valuation of stock-based compensation; and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates.
Cash Equivalents and Short-term Investments
The Company considers investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents. The Company classifies short-term investments, which consist of marketable securities with original maturities in excess of 90 days as available-for-sale. Short-term investments are reported at fair value with unrealized gains and losses included in "Accumulated other comprehensive income" within stockholders' equity in the Consolidated Balance Sheets. The amortization of premiums and discounts on the investments, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in "Interest and other income" in the Consolidated Statements of Operations. The Company uses the specific identification method to determine cost in calculating realized gains and losses upon the sale of short-term investments.
Short-term investments are reviewed periodically to identify possible other-than-temporary impairment. When evaluating the investments, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, the Company's intent to sell, or whether it would be more likely than not that the Company would be required to sell the investments before the recovery of their amortized cost basis.
Content Library
The Company obtains content through streaming content license agreements, DVD direct purchases and DVD revenue sharing agreements with studios, distributors and other suppliers.
The Company obtains content distribution rights in order to stream TV shows and movies to subscribers' TVs, computers and mobile devices. Streaming content is generally licensed for a fixed-fee for the term of the license agreement which may have multiple windows of availability. The license agreement may or may not be recognized in content library.
When the streaming license fee is known or reasonably determinable for a specific title and the specific title is first available for streaming to subscribers, the title is recognized on the Consolidated Balance Sheets in "Current content library" for the portion available for streaming within one year and in "Non-current content library" for the remaining portion. New titles recognized in the content library are classified in the line item "Additions to streaming content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company amortizes the content library on a straight-line basis over each title's contractual window of availability, which typically ranges from six months to five years. The steaming content library is reported at the lower of unamortized cost or estimated net realizable value. No write down from unamortized cost to a lower net realizable value was recorded in any of the periods presented. The amortization is classified in "Cost of revenues—Subscription" in the Consolidated Statements of Operations and in the line item "Amortization of streaming content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. Payment terms for these license fees may extend over the term of the license agreement, which could range from six months to five years. For the titles recognized in content library, the license fees due but not paid are classified on the Consolidated Balance Sheets as "Content accounts payable" for the amounts due within one year and as "Non-current content liabilities" for the amounts due beyond one year. Changes in these liabilities are classified in the line item "Change in streaming content liabilities" within net cash provided by operating activities in the Consolidated Statement of Cash Flows. The Company records the streaming content library assets and their related liability on the Consolidated Balance Sheets at the gross amount of the liability. Payments for the titles not yet available for streaming are not yet recognized in the content library but in prepaid content. Minimum commitments for titles not yet available for streaming are not yet recognized in the content library and are included in Note 5 to the consolidated financial statements.
When the streaming license fee is not known or reasonably determinable for a specific title, the title does not meet the criteria for asset recognition in the content library. Titles do not meet the criteria for asset recognition in the content library because the underlying license agreement does not specify the number of titles or the license fee per title or the windows of availability per title, so that the license fee is not known or reasonably determinable for a specific title. Typical payment terms for these agreements, which can range from three to five years, require the Company to make equal fixed payments at the beginning of each quarter of the license term. To the extent that cumulative payments exceed cumulative amortization, "Prepaid content" is recorded on the Consolidated Balance Sheets. The Company amortizes the license fees on a straight-line basis over the term of each license agreement. The amortization is classified in "Cost of revenues—Subscription" in the Consolidated Statements of Operations and in the line item "Net income" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. Changes in prepaid content are classified within net cash provided by operating activities in the line item "Prepaid content" in the Consolidated Statements of Cash Flows. Commitments for licenses that do not meet the criteria for asset recognition in the content library are included in Note 5 to the consolidated financial statements.
The Company acquires DVD content for the purpose of renting such content to its subscribers and earning subscription rental revenues, and, as such, the Company considers its direct purchase DVD library to be a productive asset. Accordingly, the Company classifies its DVD library in "Non-current content library" on the Consolidated Balance Sheets. The acquisition of DVD content library, net of changes in related liabilities, is classified in the line item "Acquisition of DVD content library" within cash used in investing activities in the Consolidated Statements of Cash Flows because the DVD content library is considered a productive asset. Other companies in the in-home entertainment video industry classify these cash flows as operating activities. The Company amortizes its direct purchase DVDs, less estimated salvage value, on a "sum-of-the-months" accelerated basis over their estimated useful lives. The useful life of the new release DVDs and back-catalog DVDs is estimated to be one year and three years, respectively. The amortization of the DVD content library is classified in "Cost of revenue- Subscription" in the Consolidated Statements of Operations and in the line item "Amortization of DVD content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company also obtains DVD content through revenue sharing agreements with studios and distributors. Revenue sharing obligations incurred based on utilization are classified in "Cost of revenues- Subscription" in the Consolidated Statements of Operations and in the line item "Net income" within net cash provided by operating activities in the Consolidated Statements of Cash flows. The terms of some revenue sharing agreements obligate the Company to make a low initial payment for certain titles, representing a minimum contractual obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of its subscription revenues or to pay a fee, based on utilization, for a defined period of time. The initial payment may be in the form of an upfront non-refundable payment which is classified in content library or in the form of a prepayment of future revenue sharing obligations which is classified as prepaid content.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets, generally up to 30 years, or the lease term for leasehold improvements, if applicable. Leased buildings are capitalized and included in property and equipment when the Company was involved in the construction funding and did not meet the "sale-leaseback" criteria.
Impairment of Long-Lived Assets
Long-lived assets such as DVD content library, property and equipment and intangible assets subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds fair value of the asset group. There were no events or changes in circumstances that would indicate that the carrying amount of an asset group may not be recoverable in any of the years presented. All of the Company's long-lived tangible assets are held in the United States.
Revenue Recognition
Subscription revenues are recognized ratably over each subscriber's monthly subscription period. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities. Deferred revenue consists of subscriptions revenues billed to subscribers that have not been recognized and gift subscriptions that have not been redeemed.
Marketing
Marketing expenses consist primarily of advertising expenses and also include payments made to the Company's affiliates and consumer electronics partners and payroll related expenses. Advertising expenses include promotional activities such as television and online advertising, as well as allocated costs of revenues relating to free trial periods. Advertising costs are expensed as incurred except for advertising production costs, which are expensed the first time the advertising is run. Advertising expense totaled approximately $299.1 million, $212.4 million and $175.0 million in 2011, 2010 and 2009, respectively.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory 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. There was no significant valuation allowance as of December 31, 2011 or 2010.
The Company did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. The Company recognizes a 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. The Company recognizes 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.
Foreign Currency
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in cumulative translation adjustment included in accumulated other comprehensive income in shareholders' equity. For transactions that are not denominated in the functional currency, the Company remeasures monetary assets and liabilities at exchange rates in effect at the end of each period. Gains and losses from these remeasurements are recognized in interest and other income.
Net Income Per Share
Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the assumed conversion of the Company's Convertible Notes, incremental shares issuable upon the assumed exercise of stock options, and for 2010 and 2009, shares that were purchasable pursuant to the Company's employee stock purchase plan ("ESPP"). The Company's ESPP was suspended in 2011 and there were no offerings in 2011. The computation of net income per share is as follows:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Basic earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic earnings per share |
$ | 4.28 | $ | 3.06 | $ | 2.05 | ||||||
|
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|
|
|
|
|
|||||||
|
Diluted earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Convertible Notes interest expense, net of tax |
17 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Numerator for diluted earnings per share |
226,143 | 160,853 | 115,860 | |||||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
Convertible Notes shares |
217 | — | — | |||||||||
|
Employee stock options and employee stock purchase plan shares |
1,305 | 1,775 | 1,856 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Weighted-average number of shares |
54,369 | 54,304 | 58,416 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted earnings per share |
$ | 4.16 | $ | 2.96 | $ | 1.98 | ||||||
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|
|
|
|||||||
Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Employee stock options |
225 | 14 | 64 | |||||||||
Stock-Based Compensation
The Company grants stock options to its employees on a monthly basis. The Company has elected to grant all options as fully vested non-qualified stock options. As a result of immediate vesting, stock-based compensation expense 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 stock-based compensation.
Stock Repurchases
To facilitate a stock repurchase program, shares are repurchased by the Company in the open market and are accounted for when the transaction is settled. Shares held for future issuance are classified as Treasury stock. Shares formally or constructively retired are deducted from common stock for par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from Retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the shares.
|
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| 2. | Short-term Investments |
The Company's investment policy is consistent with the definition of available-for-sale securities. The Company does not buy and hold securities principally for the purpose of selling them in the near future. The Company's policy is focused on the preservation of capital, liquidity and return. From time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. The following table summarizes, by major security type, the Company's assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
| December 31, 2011 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Cash |
$ | 388,941 | $ | — | $ | — | $ | 388,941 | ||||||||
|
Level 1 securities (1): |
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|
Money market funds |
123,608 | — | — | 123,608 | ||||||||||||
|
Level 2 securities (3): |
||||||||||||||||
|
Corporate debt securities |
112,264 | 603 | (214 | ) | 112,653 | |||||||||||
|
Government and agency securities |
175,464 | 694 | (56 | ) | 176,102 | |||||||||||
|
Asset and mortgage-backed securities |
941 | 62 | — | 1,003 | ||||||||||||
|
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|
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| $ | 801,218 | $ | 1,359 | $ | (270 | ) | $ | 802,307 | ||||||||
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|
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|
Less: Restricted cash (1) |
(4,496 | ) | ||||||||||||||
|
|
|
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|
Total cash, cash equivalents and short-term investments |
$ | 797,811 | ||||||||||||||
|
|
|
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| December 31, 2010 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Cash |
$ | 194,146 | $ | — | $ | — | $ | 194,146 | ||||||||
|
Level 1 securities (2): |
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|
Money market funds |
4,914 | — | — | 4,914 | ||||||||||||
|
Level 2 securities (3): |
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|
Corporate debt securities |
109,745 | 1,043 | (101 | ) | 110,687 | |||||||||||
|
Government and agency securities |
42,062 | 331 | (101 | ) | 42,292 | |||||||||||
|
Asset and mortgage-backed securities |
2,881 | 168 | (140 | ) | 2,909 | |||||||||||
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| $ | 353,748 | $ | 1,542 | $ | (342 | ) | 354,948 | |||||||||
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Less: Long-term restricted cash (2) |
(4,561 | ) | ||||||||||||||
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|
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|
Total cash, cash equivalents and short-term investments |
$ | 350,387 | ||||||||||||||
|
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| (1) | Includes $119.1 million that is included in cash and cash equivalents and $3.5 million and $1.0 million of restricted cash that is included in other non-current assets and other current assets, respectively, related to workers compensation deposits. |
| (2) | Includes $0.4 million that is included in cash and cash equivalents and $4.6 million of long-term restricted cash that is included in other non-current assets related to workers compensation deposits. |
| (3) | Included in short-term investments. |
Fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. The hierarchy level assigned to each security in the Company's available-for-sale portfolio and cash equivalents is based on its assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The fair value of available-for-sale securities and cash equivalents included in the Level 1 category is based on quoted prices that are readily and regularly available in an active market. The fair value of available-for-sale securities included in the Level 2 category is based on observable inputs, such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. These values were obtained from an independent pricing service and were evaluated using pricing models that vary by asset class and may incorporate available trade, bid and other market information and price quotes from well-established independent pricing vendors and broker-dealers. The Company's procedures include controls to ensure that appropriate fair values are recorded, such as comparing prices obtained from multiple independent sources. See Note 4 to the consolidated financial statements for further information regarding the fair value of the Company's senior convertible notes and senior notes.
Because the Company does not intend to sell the investments that are in an unrealized loss position and it is not likely that the Company will be required to sell any investments before recovery of their amortized cost basis, the Company does not consider those investments with an unrealized loss to be other-than-temporarily impaired at December 31, 2011. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in 2011, 2010 or 2009.
The gross realized gains on the sales of available-for-sale securities for the three years ended December 31, 2011, 2010 and 2009 were $0.7 million, $1.0 million and $1.9 million, respectively. There were no material gross realized losses from the sale of available-for-sale investments for the years ended December 31, 2011, 2010 and 2009. Realized gains and losses and interest income are included in interest and other income.
The estimated fair value of short-term investments by contractual maturity as of December 31, 2011 is as follows:
| (in thousands) | ||||
|
Due within one year |
$ | 108,382 | ||
|
Due after one year and through 5 years |
180,373 | |||
|
Due after 5 years and through 10 years |
— | |||
|
Due after 10 years |
1,003 | |||
|
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|
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Total short-term investments |
$ | 289,758 | ||
|
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| 3. | Balance Sheet Components |
Content Library
Content library consisted of the following:
| As of December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Streaming | DVD | Total | Streaming | DVD | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Total content library, gross |
$ | 2,552,284 | $ | 599,155 | $ | 3,151,439 | $ | 441,637 | $ | 627,392 | $ | 1,069,029 | ||||||||||||
|
Accumulated amortization |
(632,270 | ) | (552,526 | ) | (1,184,796 | ) | (143,227 | ) | (563,823 | ) | (707,050 | ) | ||||||||||||
|
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|
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Total content library, net |
1,920,014 | 46,629 | 1,966,643 | 298,410 | 63,569 | 361,979 | ||||||||||||||||||
|
Current content library, net |
919,709 | — | 919,709 | 181,006 | — | 181,006 | ||||||||||||||||||
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Non-current content library, net |
$ | 1,000,305 | $ | 46,629 | $ | 1,046,934 | $ | 117,404 | $ | 63,569 | $ | 180,973 | ||||||||||||
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Content Liabilities
Content liabilities consisted of the following:
| As of December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Streaming | DVD and other | Total | Streaming | DVD and other | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Content accounts payable |
$ | 905,792 | $ | 18,914 | $ | 924,706 | $ | 136,841 | $ | 31,854 | $ | 168,695 | ||||||||||||
|
Non-current content liabilities |
739,628 | — | 739,628 | 48,179 | — | 48,179 | ||||||||||||||||||
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Total content liabilities |
$ | 1,645,420 | $ | 18,914 | $ | 1,664,334 | $ | 185,020 | $ | 31,854 | $ | 216,874 | ||||||||||||
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The Company typically enters into multi-year licenses with studios and other distributors that may result in an increase in content library and a corresponding increase in content accounts payable and non-current content liabilities. The payment terms for these license fees may extend over the term of the license agreement, which could range from six months to five years. As of December 31, 2011, content accounts payable and non-current content liabilities increased $1.45 billion, over December 31, 2010, as compared to an increase in total content library, net, of $1.60 billion.
Property and Equipment, Net
Property and equipment and accumulated depreciation consisted of the following:
| As of December 31, | ||||||||||||
| 2011 | 2010 | |||||||||||
| (in thousands) | ||||||||||||
|
Computer equipment |
3 years | $ | 67,090 | $ | 60,289 | |||||||
|
Operations and other equipment |
5 years | 100,306 | 72,368 | |||||||||
|
Software, including internal-use software |
3years | 35,356 | 26,961 | |||||||||
|
Furniture and fixtures |
3years | 17,310 | 11,438 | |||||||||
|
Building |
30 years | 40,681 | 40,681 | |||||||||
|
Leasehold improvements |
Over life of lease | 44,473 | 36,530 | |||||||||
|
Capital work-in-progress |
|
822 | 16,882 | |||||||||
|
|
|
|
|
|||||||||
|
Property and equipment, gross |
|
306,038 | 265,149 | |||||||||
|
Less: Accumulated depreciation |
|
(169,685 | ) | (136,579 | ) | |||||||
|
|
|
|
|
|||||||||
|
Property and equipment, net |
|
$ | 136,353 | $ | 128,570 | |||||||
|
|
|
|
|
|||||||||
Accrued Expenses
Accrued expenses consisted of the following:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Accrued state sales and use tax |
$ | 14,557 | $ | 14,983 | ||||
|
Accrued payroll and employee benefits |
17,763 | 8,520 | ||||||
|
Accrued interest on debt |
2,125 | 2,125 | ||||||
|
Accrued content related costs |
10,774 | 6,950 | ||||||
|
Accrued legal settlement |
9,000 | — | ||||||
|
Current portion of lease financing obligations |
2,319 | 2,083 | ||||||
|
Other |
7,155 | 3,911 | ||||||
|
|
|
|
|
|||||
|
Accrued expenses |
$ | 63,693 | $ | 38,572 | ||||
|
|
|
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|
|||||
|
|||
| 4. | Long-term Debt |
Senior Convertible Notes
In November 2011, the Company issued $200.0 million aggregate principal amount of zero coupon senior convertible notes due on December 1, 2018 (the "Convertible Notes") in a private placement offering to TCV VII, L.P., TCV VII(A), L.P., and TCV Member Fund, L.P.,. A general partner of these funds also serves on the Company's board of directors, and as such, the issuance of the notes is considered a related party transaction. The net proceeds to the Company were approximately $197.8 million. Debt issuance costs of $2.2 million (of which $0.3 million were unpaid at December 31, 2011) were recorded in "Other non-current assets" on the Consolidated Balance Sheet and are amortized over the term of the notes as interest expense. The Convertible Notes are the Company's general, unsecured obligations and are effectively subordinated to all of the Company's existing and future secured debt, to the extent of the assets securing such debt, and are structurally subordinated to all liabilities of the Company's subsidiaries, including trade payables. The Convertible Notes do not bear interest, except in specified circumstances. The initial conversion rate for the Convertible Notes is 11.6553 shares of the Company's common stock, par value $0.001 per share, per $1,000 principal amount of notes. This is equivalent to an initial conversion price of approximately $85.80 per share of common stock. Holders may surrender their notes for conversion at any time prior to the close of business day immediately preceding the maturity date of the notes. The Convertible Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 120% of the principal amount. At any time following May 28, 2012, the Company may elect to cause the conversion of the Convertible Notes into shares of the Company's common stock when specified conditions are satisfied, including that the daily volume weighted average price of the Company's common stock is equal or greater than $111.54 for at least 50 trading days during a 65 trading day period prior to the conversion date.
The Company determined that the embedded conversion option in the Convertible Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company's own stock and would be classified in stockholder's equity if freestanding. Additionally, the Convertible Notes do not require or permit any portion of the obligation to be settled in cash and accordingly the liability and equity (conversion option) components are not required to be accounted for separately.
The Convertible Notes include, among other terms and conditions, limitations on the Company's ability to pay cash dividends or to repurchase shares of its common stock, subject to specified exceptions. At December 31, 2011, the Company was in compliance with these covenants.
Based on quoted market prices of the Company's publicly traded debt, the fair value of the Convertible Notes was approximately $206.5 million as of December 31, 2011.
Senior Notes
In November 2009, the Company issued $200.0 million aggregate principal amount of 8.50% senior notes due November 15, 2017 (the "8.50% Notes"). The net proceeds to the Company were approximately $193.9 million. Debt issuance costs of $6.1 million were recorded in "Other non-current assets" on the Consolidated Balance Sheets and are amortized over the term of the notes as interest expense. The notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at a rate of 8.50% per annum on May 15 and November 15 of each year, commencing on May 15, 2010. The 8.50% Notes are repayable in whole or in part upon the occurrence of a change of control, at the option of the holders, at a purchase price in cash equal to 101% of the principal plus accrued interest. Prior to November 15, 2012, in the event of a qualified equity offering, the Company may redeem up to 35% of the 8.50% Notes at a redemption price of 108.50% of the principal plus accrued interest. Additionally, the Company may redeem the 8.50% Notes prior to November 15, 2013 in whole or in part at a redemption price of 100% of the principal plus accrued interest, plus a "make-whole" premium. On or after November 15, 2013, the Company may redeem the 8.50% Notes in whole or in part at specified prices ranging from 104.25% to 100% of the principal plus accrued interest.
The 8.50% Notes include, among other terms and conditions, limitations on the Company's ability to create, incur, assume or be liable for indebtedness (other than specified types of permitted indebtedness); dispose of assets outside the ordinary course (subject to specified exceptions); acquire, merge or consolidate with or into another person or entity (other than specified types of permitted acquisitions); create, incur or allow any lien on any of its property or assign any right to receive income (except for specified permitted liens); make investments (other than specified types of investments); or pay dividends, make distributions, or purchase or redeem the Company's equity interests (each subject to specified exceptions). At December 31, 2011 and 2010, the Company was in compliance with these covenants.
Based on quoted market prices, the fair value of the 8.50% Notes was approximately $206.5 million and $225.0 million as of December 31, 2011 and 2010, respectively.
Credit Agreement
In September 2009, the Company entered into a credit agreement which provided for a $100 million three-year revolving line of credit. Loans under the credit agreement bore interest, at the Company's option, at either a base rate determined in accordance with the credit agreement, plus a spread of 1.75% to 2.25%, or an adjusted LIBOR rate plus a spread of 2.75% to 3.25%. In October 2009, the Company borrowed $20.0 million under the credit agreement. The proceeds, net of issuance costs, to the Company were approximately $19.0 million. In connection with the issuance of the 8.50% Notes, the Company repaid all outstanding amounts under and terminated the credit agreement. Issuance costs related to the line of credit were included in interest expense in the year ended December 31, 2009.
|
|||
| 5. | Commitments and Contingencies |
Lease obligations
The Company leases facilities under non-cancelable operating leases with various expiration dates through 2018. The facilities generally require the Company to pay property taxes, insurance and maintenance costs. Further, several lease agreements contain rent escalation clauses or rent holidays. For purposes of recognizing minimum rental expenses on a straight-line basis over the terms of the leases, the Company uses the date of initial possession to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of intended use. For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, the Company records minimum rental expenses on a straight-line basis over the terms of the leases in the Consolidated Statements of Operations. The Company has the option to extend or renew most of its leases which may increase the future minimum lease commitments.
Because the terms of the Company's original facilities lease agreements required the Company's involvement in the construction funding of the buildings at its Los Gatos, California headquarters site, the Company is the "deemed owner" (for accounting purposes only) of these buildings. Accordingly, the Company recorded an asset of $40.7 million, representing the total costs of the buildings and improvements, including the costs paid by the lessor (the legal owner of the buildings), with corresponding liabilities. Upon completion of construction of each building, the Company did not meet the sale-leaseback criteria for de-recognition of the building assets and liabilities. Therefore the leases are accounted for as financing obligations.
In the first quarter of 2010, the Company extended the facility leases for the Los Gatos buildings for an additional five year term after the remaining term of the original lease, thus increasing the future minimum payments under lease financing obligations by approximately $14 million. The leases continue to be accounted for as financing obligations and no gain or loss was recorded as a result of the lease financing modification. At December 31, 2011, the lease financing obligation balance was $34.1 million, of which $2.3 million and $31.8 million were recorded in "Accrued expenses" and "Other non-current liabilities," respectively, on the Consolidated Balance Sheet. The remaining future minimum payments under the lease financing obligation are $19.3 million. The lease financing obligation balance at the end of the extended lease term will be approximately $25.8 million which approximates the net book value of the buildings to be relinquished to the lessor.
Future minimum payments under lease financing obligations and non-cancelable operating leases as of December 31, 2011 are as follows:
|
Year Ending December 31, |
Future Minimum Payments |
|||
| (in thousands) | ||||
|
2012 |
$ | 21,773 | ||
|
2013 |
18,310 | |||
|
2014 |
14,195 | |||
|
2015 |
11,008 | |||
|
2016 |
8,580 | |||
|
Thereafter |
5,326 | |||
|
|
|
|||
|
Total minimum payments |
$ | 79,192 | ||
|
|
|
|||
Rent expense associated with the operating leases was $16.9 million, $14.9 million and $14.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.
Streaming Content
The Company had $3.91 billion and $1.12 billion of obligations at December 31, 2011 and December 31, 2010, respectively, including agreements to acquire and license streaming content that represent long-term liabilities or that are not reflected on the Consolidated Balance Sheets because they do not meet content library asset recognition criteria. The license agreements do not meet content library asset recognition criteria because either the fee is not known or reasonably determinable for a specific title or it is known but the title is not yet available for streaming to subscribers. For those agreements with variable terms, the Company does not estimate what the total obligation may be beyond any minimum quantities and/or pricing as of the reporting date. For those agreements that include renewal provisions that are solely at the option of the content provider, the Company includes the commitments associated with the renewal period to the extent such commitments are fixed or a minimum amount is specified.
The expected timing of payments as of December 31, 2011 for these commitments is as follows:
| (in thousands) | ||||
|
Less than one year |
$ | 797,649 | ||
|
Due after one year and through 3 years |
2,384,373 | |||
|
Due after 3 years and through 5 years |
650,480 | |||
|
Due after 5 years |
74,696 | |||
|
|
|
|||
|
Total streaming content obligations |
$ | 3,907,198 | ||
|
|
|
|||
The Company has entered into certain license agreements that include an unspecified or a maximum number of titles that the Company may or may not receive in the future and /or that include pricing contingent upon certain variables, such as theatrical exhibition receipts for the title. As of the reporting date, it is unknown whether the Company will receive access to these titles or what the ultimate price per title will be. Accordingly, such amounts are not reflected in the commitments described above. However such amounts are expected to be significant and the expected timing of payments could range from less than one year to more than five years.
In addition to the streaming content obligations above, the Company has licenses with certain performing rights organizations ("PRO"), and is currently involved in negotiations with other PROs, that hold certain rights to music used in connection with streaming content. For the latter, the Company accrues for estimated royalties that are due to PROs and adjusts these accruals based on any changes in estimates. While the Company anticipates finalizing these negotiations, the outcome of these negotiations is uncertain. Additionally, pending litigation between certain PROs and other third parties could impact the Company's negotiations. If the Company is unable to reach mutually acceptable terms with the PROs, the Company could become involved in similar litigation. The results of any negotiation or litigation may be materially different from management's estimates.
Litigation
From time to time, in the normal course of its operations, the Company is a party to litigation matters and claims, including claims relating to employee relations, business practices and patent infringement. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations.
On January 27, 2012, a purported shareholder class action suit was filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The complaint alleges that the Company issued materially false and misleading statements regarding the Company's business practices and its contracts with content providers, which lead to artificially inflated stock prices. The complaint alleges violation of the federal securities laws and seeks unspecified compensatory damages and other relief. A second suit was filed on January 27, 2012, alleging virtually identical claims. Management has determined a potential loss is reasonably possible however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.
On November 23, 2011, a purported shareholder derivative suit was filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The complaint alleges, among other claims, that the Company's officers and members of its Board of Directors breached their fiduciary duties, wasted valuable corporate assets, and were unjustly enriched as a result of causing the Company to buy back stock at artificially inflated prices to the detriment of the Company and its shareholders. The complaint seeks unspecified compensatory damages and other relief. Management has determined a potential loss is reasonably possible however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.
In January through April of 2009, a number of purported anti-trust class action suits were filed against the Company in various United States Federal Courts. Wal-Mart Stores, Inc. and Walmart.com USA LLC (collectively, Wal-Mart) were also named as defendants in these suits. These cases have been consolidated in the Northern District of California and have been assigned the multidistrict litigation number MDL-2029. A number of substantially similar suits were filed in California State Courts, and have been consolidated in Santa Clara County. The plaintiffs, who are current or former Netflix customers, generally alleged that Netflix and Wal-Mart entered into an agreement to divide the markets for sales and online rentals of DVDs in the United States, which resulted in higher Netflix subscription prices. A number of other cases had been filed in Federal and State courts by current or former subscribers to the online DVD rental service offered by Blockbuster Inc., alleging injury arising from similar facts. These cases have been related to MDL 2029 or, in the case of the California State cases, coordinated with the cases in Santa Clara County. The complaint(s) sought unspecified compensatory and enhanced damages, interest, costs and fees and other equitable relief. On November 22, 2011, the court granted the Company's motion for summary judgment. On December 22, 2011, plaintiff appealed the summary judgment ruling. Management has determined a potential loss is reasonably possible; however, based on its current knowledge, management does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.
The Company is involved in other litigation matters not listed above but does not consider the matters to be material either individually or in the aggregate at this time. The Company's view of the matters not listed may change in the future as the litigation and events related thereto unfold.
|
|||
| 6. | Guarantees—Indemnification Obligations |
In the ordinary course of business, the Company has entered into contractual arrangements under which it has agreed to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements and out of intellectual property infringement claims made by third parties. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract.
The Company's obligations under these agreements may be limited in terms of time or amount, and in some instances, the Company may have recourse against third-parties for certain payments. In addition, the Company has entered into indemnification agreements with its directors and certain of its officers that will require it, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations vary.
It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. No amount has been accrued in the accompanying financial statements with respect to these indemnification guarantees.
|
|||
| 7. | Stockholders' Equity |
On November 28, 2011, the Company issued 2.9 million shares of common stock upon the closing of a public offering for $200 million net of issuance costs of $0.5 million, the majority of which were unpaid as of December 31, 2011.
Stock Repurchase Program
The following table presents a summary of the Company's stock repurchases:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Total number of shares repurchased |
900 | 2,606 | 7,371 | |||||||||
|
Dollar amount of shares repurchased |
$ | 199,666 | 210,259 | 324,335 | ||||||||
|
Average price paid per share |
$ | 221.88 | $ | 80.67 | $ | 44.00 | ||||||
|
Range of price paid per share |
$ | 160.11 – 248.78 | $ | 60.23 – $126.01 | $ | 34.70 – $60.00 | ||||||
Under the current stock repurchase plan, announced on June 11, 2010, the Company is authorized to repurchase up to $300 million of its common stock through the end of 2012. As of December 31, 2011, $41.0 million of this authorization is remaining. The timing and actual number of shares repurchased is at management's discretion and will depend on various factors including price, corporate and regulatory requirements, debt covenant requirements, alternative investment opportunities and other market conditions.
Shares repurchased by the Company are accounted for when the transaction is settled. There were no unsettled share repurchases at December 31, 2011. Shares repurchased and retired are deducted from common stock for par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the shares. During the year ended December 31, 2011, $40.9 million was deducted from retained earnings related to share repurchases.
In the fourth quarter of 2009, the Company determined that all shares held in treasury stock would be retired. Accordingly, these constructively retired shares were deducted from common stock for par value and from additional paid in capital for the excess over par value, until additional paid in capital was exhausted and then from retained earnings.
Preferred Stock
The Company has authorized 10,000,000 shares of undesignated preferred stock with par value of $0.001 per share. None of the preferred shares were issued and outstanding at December 31, 2011 and 2010.
Voting Rights
The holders of each share of common stock shall be entitled to one vote per share on all matters to be voted upon by the Company's stockholders.
Stock Option Plans
In June 2011, the Company adopted the 2011 Stock Plan. The 2011 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units to employees, directors and consultants. As of December 31, 2011, 5,700,000 shares were reserved for future grants under the 2011 Stock Plan.
In February 2002, the Company adopted the 2002 Stock Plan, which was amended and restated in May 2006. The 2002 Stock Plan provides for the grant of incentive stock options to employees and for the grant of non-statutory stock options and stock purchase rights to employees, directors and consultants. As of December 31, 2011, 1,313,508 shares were reserved for future grants under the 2002 Stock Plan and the large majority will expire in the first quarter of 2012.
A summary of the activities related to the Company's options is as follows:
| Shares Available for Grant |
Options Outstanding | Weighted- Average Remaining Contractual Term (in Years) |
Aggregate Intrinsic Value (in Thousands) |
|||||||||||||||||
| Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||||||||
|
Balances as of December 31, 2008 |
3,192,515 | 5,365,016 | 18.81 | |||||||||||||||||
|
Granted |
(601,665 | ) | 601,665 | 41.65 | ||||||||||||||||
|
Exercised |
— | (1,724,110 | ) | 17.11 | ||||||||||||||||
|
Canceled |
1,133 | (1,133 | ) | 12.69 | ||||||||||||||||
|
Expired |
(716 | ) | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Balances as of December 31, 2009 |
2,591,267 | 4,241,438 | 22.74 | |||||||||||||||||
|
Granted |
(552,765 | ) | 552,765 | 99.58 | ||||||||||||||||
|
Exercised |
— | (1,902,073 | ) | 24.75 | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Balances as of December 31, 2010 |
2,038,502 | 2,892,130 | 36.11 | |||||||||||||||||
|
Authorized |
5,700,000 | — | — | |||||||||||||||||
|
Granted |
(724,994 | ) | 724,994 | 154.09 | ||||||||||||||||
|
Exercised |
— | (659,370 | ) | 29.11 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Balances as of December 31, 2011 |
7,013,508 | 2,957,754 | 66.59 | 6.28 | 84,482 | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Vested and exercisable at |
2,957,754 | 66.59 | 6.28 | 84,482 | ||||||||||||||||
Cash received from option exercises for the years ended December 31, 2011, 2010 and 2009 was $19.6 million, $47.1 million and $29.5 million, respectively.
The following table summarizes information on outstanding and exercisable options as of December 31, 2011:
|
Options Outstanding and Exercisable |
||||||||||||
|
Exercise Price |
Number of Options |
Weighted-Average Remaining Contractual Life (Years) |
Weighted-Average Exercise Price |
|||||||||
|
$ 1.50 – $11.48 |
310,542 | 2.22 | $ | 8.08 | ||||||||
|
$ 11.57 – $18.14 |
311,566 | 3.25 | 14.65 | |||||||||
|
$ 19.34 – $23.48 |
302,259 | 5.10 | 21.52 | |||||||||
|
$ 23.78 – $27.55 |
300,998 | 4.62 | 26.32 | |||||||||
|
$ 28.13 – $34.75 |
304,110 | 5.40 | 30.91 | |||||||||
|
$ 35.36 – $53.80 |
314,372 | 6.55 | 42.35 | |||||||||
|
$ 58.23 – $75.00 |
308,609 | 9.07 | 67.04 | |||||||||
|
$ 80.09 – $113.25 |
359,849 | 9.29 | 98.03 | |||||||||
|
$134.91 – $237.19 |
298,455 | 9.09 | 196.19 | |||||||||
|
$242.09 – $267.99 |
146,994 | 9.43 | 259.98 | |||||||||
|
|
|
|||||||||||
| 2,957,754 | ||||||||||||
|
|
|
|||||||||||
Employee Stock Purchase Plan
In February 2002, the Company adopted the 2002 Employee Stock Purchase Plan ("ESPP") under which employees purchased common stock of the Company through accumulated payroll deductions. The purchase price of the common stock acquired by the employees participating in the ESPP is 85% of the closing price on either the first day of the offering period or the last day of the purchase period, whichever was lower. Under the ESPP, the offering and purchase periods took place concurrently in consecutive six month increments. Therefore, the look-back for determining the purchase price was six months. Employees could invest up to 15% of their gross compensation through payroll deductions. In no event was an employee permitted to purchase more than 8,334 shares of common stock during any six-month purchase period.
As of December 31, 2011, there were 2,785,721 shares available for future issuance under the 2002 Employee Stock Purchase Plan. The Company's ESPP was suspended in 2011 and there were no offerings in 2011.
During the years ended December 31, 2010 and 2009, employees purchased approximately 46,112 and 224,799 shares at average prices of $58.41 and $25.65 per share, respectively. Cash received from purchases under the ESPP for the years ended December 31, 2010 and 2009 was $2.7 million and $5.8 million, respectively.
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. Vested stock options granted after January 2007 will remain exercisable for the full ten year contractual term regardless of employment status. The following table summarizes the assumptions used to value option grants using the lattice-binomial model:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Dividend yield |
0% | 0% | 0% | |||||||||
|
Expected volatility |
51% – 65% | 46% – 54% | 46% – 56% | |||||||||
|
Risk-free interest rate |
2.05% – 3.42% | 2.65% – 3.67% | 2.60% – 3.62% | |||||||||
|
Suboptimal exercise factor |
2.17 – 3.64 | 1.78 – 3.28 | 1.73 – 2.01 | |||||||||
The Company bifurcates its option grants into two employee groupings (executive and non-executive) based on exercise behavior and considers several factors in determining the estimate of expected term for each group, including the historical option exercise behavior, the terms and vesting periods of the options granted.
The following table outlines the suboptimal exercise factor used and the resulting calculated expected term of the option grants:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Executives: |
||||||||||||
|
Suboptimal exercise factor |
3.39 – 3.64 | 2.15 – 3.28 | 1.87 – 2.01 | |||||||||
|
Expected term of the option grants (in years) |
8 | 6 | 4 | |||||||||
|
Non-Executives: |
||||||||||||
|
Suboptimal exercise factor |
2.17 – 2.26 | 1.78 – 2.09 | 1.73 – 1.76 | |||||||||
|
Expected term of the option grants (in years) |
5 | 4 | 3 | |||||||||
The following table summarizes the assumptions used to value shares under the ESPP in 2010 and 2009, using the Black-Scholes option pricing model:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Dividend yield |
0 | % | 0% | |||||
|
Expected volatility |
45 | % | 42% – 55% | |||||
|
Risk-free interest rate |
0.24 | % | 0.16% –0.35% | |||||
|
Expected life (in years) |
0.5 | 0.5 | ||||||
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 includes historical volatility in its computation due to low trade volume of its tradable forward call options in certain periods, there by precluding sole reliance on implied volatility.
In valuing shares issued under the Company's employee stock option plans, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the contractual term of the options. In valuing shares issued under the Company's ESPP, the Company bases the risk-free interest rate on U.S. Treasury zero-coupon issues with terms similar to the expected term of the shares. 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 2011, 2010 and 2009 was $84.94, $49.31 and $17.79 per share, respectively. The weighted-average fair value of shares granted under the ESPP during 2010 and 2009 was $21.27 and $10.53 per share, respectively.
The following table summarizes stock-based compensation expense, net of tax, related to stock option plans and employee stock purchases which were allocated as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Fulfillment expenses |
$ | 1,500 | $ | 1,145 | $ | 380 | ||||||
|
Marketing |
6,107 | 3,043 | 1,786 | |||||||||
|
Technology and development |
28,922 | 10,189 | 4,453 | |||||||||
|
General and administrative |
25,053 | 13,619 | 5,999 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Stock-based compensation expense before income taxes |
61,582 | 27,996 | 12,618 | |||||||||
|
Income tax benefit |
(22,847 | ) | (11,161 | ) | (5,017 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total stock-based compensation after income taxes |
$ | 38,735 | $ | 16,835 | $ | 7,601 | ||||||
|
|
|
|
|
|
|
|||||||
|
|||
| 8. | Income Taxes |
The components of provision for income taxes for all periods presented were as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Current tax provision: |
||||||||||||
|
Federal |
$ | 123,406 | $ | 86,002 | $ | 55,104 | ||||||
|
State |
28,657 | 21,803 | 14,900 | |||||||||
|
Foreign |
(70 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total current |
151,993 | 107,805 | 70,004 | |||||||||
|
Deferred tax provision: |
||||||||||||
|
Federal |
(14,008 | ) | (1,615 | ) | 6,568 | |||||||
|
State |
(4,589 | ) | 653 | (240 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred |
(18,597 | ) | (962 | ) | 6,328 | |||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
$ | 133,396 | $ | 106,843 | $ | 76,332 | ||||||
|
|
|
|
|
|
|
|||||||
Income tax benefits attributable to the exercise of employee stock options at $45.5 million, $62.2 million and $12.4 million in 2011, 2010 and 2009, respectively, are recorded directly to additional paid-in-capital.
A reconciliation of the provision for income taxes, with the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Expected tax expense at U.S. federal statutory rate of 35% |
$ | 125,833 | $ | 93,694 | $ | 67,267 | ||||||
|
State income taxes, net of Federal income tax effect |
15,042 | 15,349 | 10,350 | |||||||||
|
R&D tax credit |
(8,365 | ) | (3,207 | ) | (1,616 | ) | ||||||
|
Other |
886 | 1,007 | 331 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
$ | 133,396 | $ | 106,843 | $ | 76,332 | ||||||
|
|
|
|
|
|
|
|||||||
The tax effects of temporary differences and tax carryforwards that give rise to significant portions of the deferred tax assets are presented below:
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred tax assets/(liabilities): |
||||||||
|
Accruals and reserves |
$ | 9,193 | $ | 1,764 | ||||
|
Depreciation |
(17,381 | ) | (5,970 | ) | ||||
|
Stock-based compensation |
39,337 | 19,084 | ||||||
|
R&D credits |
6,335 | 4,351 | ||||||
|
Other |
844 | 461 | ||||||
|
|
|
|
|
|||||
|
Deferred tax assets |
$ | 38,328 | $ | 19,690 | ||||
|
|
|
|
|
|||||
Deferred tax assets include $10.0 million and $2.2 million classified as "Other current assets" and $28.3 million and $17.5 million classified as "Other non-current assets" in the Consolidated Balance Sheets as of December 31, 2011 and 2010, respectively. In evaluating its ability to realize the net deferred tax assets, the Company considered all available positive and negative evidence, including its past operating results and the forecast of future market growth, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. As of December 31, 2011 and 2010, it was considered more likely than not that substantially all deferred tax assets would be realized, and no significant valuation allowance was recorded.
In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 were signed into law. One of the major components of this legislation is the reinstatement of the Federal R&D credit retroactively to January 1, 2010. As a result, the Company recorded a Federal R&D credit of approximately $1.8 million as a discrete item in the fourth quarter of 2010.
The Company classifies unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as "Other non-current liabilities" in the Consolidated Balance Sheets. As of December 31, 2011, the total amount of gross unrecognized tax benefits was $28.1 million, of which $22.4 million, if recognized, would favorably impact the Company's effective tax rate. The aggregate changes in the Company's total gross amount of unrecognized tax benefits are summarized as follows (in thousands):
|
Balance as of December 31, 2009 |
$ | 13,244 | ||
|
Increases related to tax positions taken during prior periods |
1,150 | |||
|
Increases related to tax positions taken during the current period |
6,283 | |||
|
|
|
|||
|
Balance as of December 31, 2010 |
$ | 20,677 | ||
|
Decreases related to tax positions taken during prior periods |
(46 | ) | ||
|
Increases related to tax positions taken during the current period |
10,739 | |||
|
Decreases related to expiration of statute of limitations |
(3,237 | ) | ||
|
|
|
|||
|
Balance as of December 31, 2011 |
$ | 28,133 | ||
|
|
|
The Company includes interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of December 31, 2011, the total amount of gross interest and penalties accrued was $2.4 million, which is classified as "Other non-current liabilities" in the Consolidated Balance Sheet.
The Company files U.S. federal and state tax returns. The Company is currently under examination by the IRS for the years 2008 and 2009, and the year 2010 remains subject to examination by the IRS. The statute of limitations for years 1997 through 2007 expired in September 2011 which resulted in a discrete benefit of approximately $3.5 million in the three months ended September 30, 2011. The Company is currently under examination by the state of California for the years 2006 and 2007. The years 1997 through 2005, as well as 2008 through 2010, remain subject to examination by the state of California.
Given the potential outcome of the current examinations as well as the impact of the current examinations on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could significantly change within the next twelve months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be made.
|
|||
| 9. | Employee Benefit Plan |
The Company maintains a 401(k) savings plan covering substantially all of its employees. Eligible employees may contribute up to 60% of their annual salary through payroll deductions, but not more than the statutory limits set by the Internal Revenue Service. The Company matches employee contributions at the discretion of the Board of Directors. During 2011, 2010 and 2009, the Company's matching contributions totaled $4.0 million, $2.8 million and $2.3 million, respectively.
|
|||
| 10. | Segment Information |
Effective in the fourth quarter of 2011, the Company has three operating segments: Domestic streaming, International streaming and Domestic DVD. Segment information is presented along the same lines that the Company's chief operating decision maker reviews the operating results in assessing performance and allocating resources. The Company's chief operating decision maker reviews revenue and contribution profit for each of the reportable segments. Contribution profit is defined as revenues less cost of revenues and marketing expenses. There are no internal revenue transactions between the Company's reporting segments. In addition, the Company does not identify or allocate its assets by reportable segment and all of the Company's long-lived tangible assets are held in the United States. The Domestic and International streaming segments derive revenue from monthly subscription services consisting solely of streaming content. The Domestic DVD segment derives revenue from monthly subscription services consisting solely of DVD-by-mail.
Between the fourth quarter of 2010 and the third quarter of 2011, the Company had two operating segments: Domestic and International. During this time, the Company's domestic streaming content and DVD-by-mail operations were combined. Subscribers in the United States were able to receive both streaming content and DVDs under a single hybrid plan. Accordingly, revenues were generated and marketing expenses were incurred in connection with the subscription offerings as a whole. Therefore, it is impracticable to allocate revenues or marketing expenses or present discrete segment information for the Domestic streaming and Domestic DVD segments for periods prior to the fourth quarter of 2011.
In the third quarter of 2011, the Company made certain changes to its domestic pricing and plan structure which require subscribers who wish to receive both DVDs-by-mail and streaming content to have two separate subscription plans. Following this change, beginning in the fourth quarter of 2011, the Company was able to generate discrete financial information for its Domestic DVD and Domestic streaming operations and began reporting this information to the chief operating decision maker for review.
Prior to the fourth quarter of 2010, the Company had a single segment as international operations had not yet commenced.
The following table represents segment information for the fourth quarter of 2011:
| As of/Three Months ended December 31, 2011 | ||||||||||||||||
| Domestic Streaming |
International Streaming |
Domestic DVD |
Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Total subscriptions at end of period |
21,671 | 1,858 | 11,165 | — | ||||||||||||
|
Revenues |
$ | 476,334 | $ | 28,988 | $ | 370,253 | $ | 875,575 | ||||||||
|
Cost of revenues and marketing expense |
424,224 | 88,731 | 176,488 | 689,443 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Contribution profit (loss) |
$ | 52,110 | $ | (59,743 | ) | $ | 193,765 | 186,132 | ||||||||
|
|
|
|
|
|
|
|||||||||||
|
Other operating expenses |
124,260 | |||||||||||||||
|
|
|
|||||||||||||||
|
Operating income |
61,872 | |||||||||||||||
|
|
|
|||||||||||||||
|
Other income (expense) |
(5,037 | ) | ||||||||||||||
|
Provision for income taxes |
21,616 | |||||||||||||||
|
|
|
|||||||||||||||
|
Net income |
$ | 35,219 | ||||||||||||||
|
|
|
|||||||||||||||
The following tables represent the Company's segment information for the years ended December 31, 2011 and 2010 based on the Company's segment reporting prior to the fourth quarter of 2011:
| As of/Year ended December 31, 2011 | ||||||||||||
| Domestic | International | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
|
Total unique subscribers at end of period |
24,395 | 1,858 | 26,253 | |||||||||
|
Revenues |
$ | 3,121,727 | $ | 82,850 | $ | 3,204,577 | ||||||
|
Cost of revenues and marketing expense |
2,256,540 | 185,999 | 2,442,539 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Contribution profit (loss) |
$ | 865,187 | $ | (103,149 | ) | 762,038 | ||||||
|
|
|
|
|
|||||||||
|
Other operating expenses |
385,970 | |||||||||||
|
|
|
|||||||||||
|
Operating income |
376,068 | |||||||||||
|
|
|
|||||||||||
|
Other income (expense) |
(16,546 | ) | ||||||||||
|
Provision for income taxes |
133,396 | |||||||||||
|
|
|
|||||||||||
|
Net income |
$ | 226,126 | ||||||||||
|
|
|
|||||||||||
| As of/Year ended December 31, 2010 | ||||||||||||
| Domestic | International | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
|
Total unique subscribers at end of period |
19,501 | 509 | 20,010 | |||||||||
|
Revenues |
$ | 2,159,008 | $ | 3,617 | $ | 2,162,625 | ||||||
|
Cost of revenues and marketing expense |
1,635,459 | 15,735 | 1,651,194 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Contribution profit (loss) |
$ | 523,549 | $ | (12,118 | ) | 511,431 | ||||||
|
|
|
|
|
|||||||||
|
Other operating expenses |
227,790 | |||||||||||
|
|
|
|||||||||||
|
Operating income |
283,641 | |||||||||||
|
|
|
|||||||||||
|
Other income (expense) |
(15,945 | ) | ||||||||||
|
Provision for income taxes |
106,843 | |||||||||||
|
|
|
|||||||||||
|
Net income |
$ | 160,853 | ||||||||||
|
|
|
|||||||||||
|
|||
| 11. | Subsequent Event |
Subsequent to December 31, 2011, the Company engaged in mediation of a legal claim pending in the Northern District of California made in January 2011 related to the Company's compliance with the Video Privacy Protection Act. This mediation resulted in a settlement of the matter which includes payment of $9.0 million, which is recognized in the Consolidated Statement of Operations for the year ended December 31, 2011, and is anticipated to be paid in 2012. The Company had previously evaluated this claim and determined it to be immaterial and that any potential loss was not probable. Accordingly, no amount had been accrued prior to the mediation and settlement.
|
|||
| 12. | Selected Quarterly Financial Data (Unaudited) |
| December 31 | September 30 | June 30 | March 31 | |||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||
|
2011 |
||||||||||||||||
|
Total revenues |
$ | 875,575 | $ | 821,839 | $ | 788,610 | $ | 718,553 | ||||||||
|
Gross profit |
300,420 | 285,222 | 298,632 | 280,402 | ||||||||||||
|
Net income (1) |
35,219 | 62,460 | 68,214 | 60,233 | ||||||||||||
|
Net income per share: |
||||||||||||||||
|
Basic |
$ | 0.66 | $ | 1.19 | $ | 1.30 | $ | 1.14 | ||||||||
|
Diluted |
0.64 | 1.16 | 1.26 | 1.11 | ||||||||||||
|
2010 |
||||||||||||||||
|
Total revenues |
$ | 595,922 | $ | 553,219 | $ | 519,819 | $ | 493,665 | ||||||||
|
Gross profit |
205,132 | 208,750 | 204,885 | 186,503 | ||||||||||||
|
Net income |
47,095 | 37,967 | 43,519 | 32,272 | ||||||||||||
|
Net income per share: |
||||||||||||||||
|
Basic |
$ | 0.90 | $ | 0.73 | $ | 0.83 | $ | 0.61 | ||||||||
|
Diluted |
0.87 | 0.70 | 0.80 | 0.59 | ||||||||||||
| (1) | Net income for the three months ended December 31, 2011 includes $9.0 million of expense related to a legal settlement and $9.5 million of expense related to termination benefits associated with the Company's retraction of plans to separate and rebrand the DVD-by-mail service. An additional $1.8 million of expense related to these termination benefits is expected to be recognized in the first quarter of 2012. As of December 31, 2011, $4.9 million of the costs were included in "Accrued expenses" on the Consolidated Balance Sheet to be paid in the first quarter of 2012. |
|
|||
Description of Business
Netflix, Inc. (the "Company") was incorporated on August 29, 1997 and began operations on April 14, 1998. The Company is an Internet subscription service streaming TV shows and movies. The Company's subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices and in the United States, subscribers can receive DVDs delivered quickly to their homes.
The Company is organized into three operating segments, Domestic streaming, International streaming and Domestic DVD. Substantially all of the Company's revenues are generated in the United States, and all of the Company's long-lived tangible assets are held in the United States. The Company's revenues are derived from monthly subscription fees.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
Reclassification
Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications did not impact any prior amounts of reported total assets, total liabilities, stockholders' equity, results of operations or cash flows.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the amortization policy of its content library; the valuation of stock-based compensation; and the recognition and measurement of income tax assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results may differ from these estimates.
Cash Equivalents and Short-term Investments
The Company considers investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents. The Company classifies short-term investments, which consist of marketable securities with original maturities in excess of 90 days as available-for-sale. Short-term investments are reported at fair value with unrealized gains and losses included in "Accumulated other comprehensive income" within stockholders' equity in the Consolidated Balance Sheets. The amortization of premiums and discounts on the investments, realized gains and losses, and declines in value judged to be other-than-temporary on available-for-sale securities are included in "Interest and other income" in the Consolidated Statements of Operations. The Company uses the specific identification method to determine cost in calculating realized gains and losses upon the sale of short-term investments.
Short-term investments are reviewed periodically to identify possible other-than-temporary impairment. When evaluating the investments, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, the Company's intent to sell, or whether it would be more likely than not that the Company would be required to sell the investments before the recovery of their amortized cost basis.
Content Library
The Company obtains content through streaming content license agreements, DVD direct purchases and DVD revenue sharing agreements with studios, distributors and other suppliers.
The Company obtains content distribution rights in order to stream TV shows and movies to subscribers' TVs, computers and mobile devices. Streaming content is generally licensed for a fixed-fee for the term of the license agreement which may have multiple windows of availability. The license agreement may or may not be recognized in content library.
When the streaming license fee is known or reasonably determinable for a specific title and the specific title is first available for streaming to subscribers, the title is recognized on the Consolidated Balance Sheets in "Current content library" for the portion available for streaming within one year and in "Non-current content library" for the remaining portion. New titles recognized in the content library are classified in the line item "Additions to streaming content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company amortizes the content library on a straight-line basis over each title's contractual window of availability, which typically ranges from six months to five years. The steaming content library is reported at the lower of unamortized cost or estimated net realizable value. No write down from unamortized cost to a lower net realizable value was recorded in any of the periods presented. The amortization is classified in "Cost of revenues—Subscription" in the Consolidated Statements of Operations and in the line item "Amortization of streaming content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. Payment terms for these license fees may extend over the term of the license agreement, which could range from six months to five years. For the titles recognized in content library, the license fees due but not paid are classified on the Consolidated Balance Sheets as "Content accounts payable" for the amounts due within one year and as "Non-current content liabilities" for the amounts due beyond one year. Changes in these liabilities are classified in the line item "Change in streaming content liabilities" within net cash provided by operating activities in the Consolidated Statement of Cash Flows. The Company records the streaming content library assets and their related liability on the Consolidated Balance Sheets at the gross amount of the liability. Payments for the titles not yet available for streaming are not yet recognized in the content library but in prepaid content. Minimum commitments for titles not yet available for streaming are not yet recognized in the content library and are included in Note 5 to the consolidated financial statements.
When the streaming license fee is not known or reasonably determinable for a specific title, the title does not meet the criteria for asset recognition in the content library. Titles do not meet the criteria for asset recognition in the content library because the underlying license agreement does not specify the number of titles or the license fee per title or the windows of availability per title, so that the license fee is not known or reasonably determinable for a specific title. Typical payment terms for these agreements, which can range from three to five years, require the Company to make equal fixed payments at the beginning of each quarter of the license term. To the extent that cumulative payments exceed cumulative amortization, "Prepaid content" is recorded on the Consolidated Balance Sheets. The Company amortizes the license fees on a straight-line basis over the term of each license agreement. The amortization is classified in "Cost of revenues—Subscription" in the Consolidated Statements of Operations and in the line item "Net income" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. Changes in prepaid content are classified within net cash provided by operating activities in the line item "Prepaid content" in the Consolidated Statements of Cash Flows. Commitments for licenses that do not meet the criteria for asset recognition in the content library are included in Note 5 to the consolidated financial statements.
The Company acquires DVD content for the purpose of renting such content to its subscribers and earning subscription rental revenues, and, as such, the Company considers its direct purchase DVD library to be a productive asset. Accordingly, the Company classifies its DVD library in "Non-current content library" on the Consolidated Balance Sheets. The acquisition of DVD content library, net of changes in related liabilities, is classified in the line item "Acquisition of DVD content library" within cash used in investing activities in the Consolidated Statements of Cash Flows because the DVD content library is considered a productive asset. Other companies in the in-home entertainment video industry classify these cash flows as operating activities. The Company amortizes its direct purchase DVDs, less estimated salvage value, on a "sum-of-the-months" accelerated basis over their estimated useful lives. The useful life of the new release DVDs and back-catalog DVDs is estimated to be one year and three years, respectively. The amortization of the DVD content library is classified in "Cost of revenue- Subscription" in the Consolidated Statements of Operations and in the line item "Amortization of DVD content library" within net cash provided by operating activities in the Consolidated Statements of Cash Flows. The Company also obtains DVD content through revenue sharing agreements with studios and distributors. Revenue sharing obligations incurred based on utilization are classified in "Cost of revenues- Subscription" in the Consolidated Statements of Operations and in the line item "Net income" within net cash provided by operating activities in the Consolidated Statements of Cash flows. The terms of some revenue sharing agreements obligate the Company to make a low initial payment for certain titles, representing a minimum contractual obligation under the agreement. The low initial payment is in exchange for a commitment to share a percentage of its subscription revenues or to pay a fee, based on utilization, for a defined period of time. The initial payment may be in the form of an upfront non-refundable payment which is classified in content library or in the form of a prepayment of future revenue sharing obligations which is classified as prepaid content.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the shorter of the estimated useful lives of the respective assets, generally up to 30 years, or the lease term for leasehold improvements, if applicable. Leased buildings are capitalized and included in property and equipment when the Company was involved in the construction funding and did not meet the "sale-leaseback" criteria.
Impairment of Long-Lived Assets
Long-lived assets such as DVD content library, property and equipment and intangible assets subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of asset groups to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of an asset group exceeds fair value of the asset group. There were no events or changes in circumstances that would indicate that the carrying amount of an asset group may not be recoverable in any of the years presented. All of the Company's long-lived tangible assets are held in the United States.
Revenue Recognition
Subscription revenues are recognized ratably over each subscriber's monthly subscription period. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities. Deferred revenue consists of subscriptions revenues billed to subscribers that have not been recognized and gift subscriptions that have not been redeemed.
Marketing
Marketing expenses consist primarily of advertising expenses and also include payments made to the Company's affiliates and consumer electronics partners and payroll related expenses. Advertising expenses include promotional activities such as television and online advertising, as well as allocated costs of revenues relating to free trial periods. Advertising costs are expensed as incurred except for advertising production costs, which are expensed the first time the advertising is run. Advertising expense totaled approximately $299.1 million, $212.4 million and $175.0 million in 2011, 2010 and 2009, respectively.
Income Taxes
The Company records a tax provision for the anticipated tax consequences of the reported results of operations using the asset and liability method. Deferred income taxes are recognized by applying enacted statutory 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. There was no significant valuation allowance as of December 31, 2011 or 2010.
The Company did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. The Company recognizes a 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. The Company recognizes 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.
Foreign Currency
The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in cumulative translation adjustment included in accumulated other comprehensive income in shareholders' equity. For transactions that are not denominated in the functional currency, the Company remeasures monetary assets and liabilities at exchange rates in effect at the end of each period. Gains and losses from these remeasurements are recognized in interest and other income.
Net Income Per Share
Basic net income per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted net income per share is computed using the weighted-average number of outstanding shares of common stock and, when dilutive, potential common shares outstanding during the period. Potential common shares consist of shares issuable upon the assumed conversion of the Company's Convertible Notes, incremental shares issuable upon the assumed exercise of stock options, and for 2010 and 2009, shares that were purchasable pursuant to the Company's employee stock purchase plan ("ESPP"). The Company's ESPP was suspended in 2011 and there were no offerings in 2011. The computation of net income per share is as follows:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Basic earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic earnings per share |
$ | 4.28 | $ | 3.06 | $ | 2.05 | ||||||
|
|
|
|
|
|
|
|||||||
|
Diluted earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Convertible Notes interest expense, net of tax |
17 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Numerator for diluted earnings per share |
226,143 | 160,853 | 115,860 | |||||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
Convertible Notes shares |
217 | — | — | |||||||||
|
Employee stock options and employee stock purchase plan shares |
1,305 | 1,775 | 1,856 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Weighted-average number of shares |
54,369 | 54,304 | 58,416 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted earnings per share |
$ | 4.16 | $ | 2.96 | $ | 1.98 | ||||||
|
|
|
|
|
|
|
|||||||
Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Employee stock options |
225 | 14 | 64 | |||||||||
Stock-Based Compensation
The Company grants stock options to its employees on a monthly basis. The Company has elected to grant all options as fully vested non-qualified stock options. As a result of immediate vesting, stock-based compensation expense 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 stock-based compensation.
Stock Repurchases
To facilitate a stock repurchase program, shares are repurchased by the Company in the open market and are accounted for when the transaction is settled. Shares held for future issuance are classified as Treasury stock. Shares formally or constructively retired are deducted from common stock for par value and from additional paid in capital for the excess over par value. If additional paid in capital has been exhausted, the excess over par value is deducted from Retained earnings. Direct costs incurred to acquire the shares are included in the total cost of the shares.
|
|||
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Basic earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Basic earnings per share |
$ | 4.28 | $ | 3.06 | $ | 2.05 | ||||||
|
|
|
|
|
|
|
|||||||
|
Diluted earnings per share: |
||||||||||||
|
Net income |
$ | 226,126 | $ | 160,853 | $ | 115,860 | ||||||
|
Convertible Notes interest expense, net of tax |
17 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
|
Numerator for diluted earnings per share |
226,143 | 160,853 | 115,860 | |||||||||
|
Shares used in computation: |
||||||||||||
|
Weighted-average common shares outstanding |
52,847 | 52,529 | 56,560 | |||||||||
|
Convertible Notes shares |
217 | — | — | |||||||||
|
Employee stock options and employee stock purchase plan shares |
1,305 | 1,775 | 1,856 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Weighted-average number of shares |
54,369 | 54,304 | 58,416 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Diluted earnings per share |
$ | 4.16 | $ | 2.96 | $ | 1.98 | ||||||
|
|
|
|
|
|
|
|||||||
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Employee stock options |
225 | 14 | 64 | |||||||||
|
|||
| December 31, 2011 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Cash |
$ | 388,941 | $ | — | $ | — | $ | 388,941 | ||||||||
|
Level 1 securities (1): |
||||||||||||||||
|
Money market funds |
123,608 | — | — | 123,608 | ||||||||||||
|
Level 2 securities (3): |
||||||||||||||||
|
Corporate debt securities |
112,264 | 603 | (214 | ) | 112,653 | |||||||||||
|
Government and agency securities |
175,464 | 694 | (56 | ) | 176,102 | |||||||||||
|
Asset and mortgage-backed securities |
941 | 62 | — | 1,003 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 801,218 | $ | 1,359 | $ | (270 | ) | $ | 802,307 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Less: Restricted cash (1) |
(4,496 | ) | ||||||||||||||
|
|
|
|||||||||||||||
|
Total cash, cash equivalents and short-term investments |
$ | 797,811 | ||||||||||||||
|
|
|
|||||||||||||||
| December 31, 2010 | ||||||||||||||||
| Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
| (in thousands) | ||||||||||||||||
|
Cash |
$ | 194,146 | $ | — | $ | — | $ | 194,146 | ||||||||
|
Level 1 securities (2): |
||||||||||||||||
|
Money market funds |
4,914 | — | — | 4,914 | ||||||||||||
|
Level 2 securities (3): |
||||||||||||||||
|
Corporate debt securities |
109,745 | 1,043 | (101 | ) | 110,687 | |||||||||||
|
Government and agency securities |
42,062 | 331 | (101 | ) | 42,292 | |||||||||||
|
Asset and mortgage-backed securities |
2,881 | 168 | (140 | ) | 2,909 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 353,748 | $ | 1,542 | $ | (342 | ) | 354,948 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Less: Long-term restricted cash (2) |
(4,561 | ) | ||||||||||||||
|
|
|
|||||||||||||||
|
Total cash, cash equivalents and short-term investments |
$ | 350,387 | ||||||||||||||
|
|
|
|||||||||||||||
| (1) | Includes $119.1 million that is included in cash and cash equivalents and $3.5 million and $1.0 million of restricted cash that is included in other non-current assets and other current assets, respectively, related to workers compensation deposits. |
| (2) | Includes $0.4 million that is included in cash and cash equivalents and $4.6 million of long-term restricted cash that is included in other non-current assets related to workers compensation deposits. |
| (3) | Included in short-term investments. |
| (in thousands) | ||||
|
Due within one year |
$ | 108,382 | ||
|
Due after one year and through 5 years |
180,373 | |||
|
Due after 5 years and through 10 years |
— | |||
|
Due after 10 years |
1,003 | |||
|
|
|
|||
|
Total short-term investments |
$ | 289,758 | ||
|
|
|
|||
|
|||
| As of December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Streaming | DVD | Total | Streaming | DVD | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Total content library, gross |
$ | 2,552,284 | $ | 599,155 | $ | 3,151,439 | $ | 441,637 | $ | 627,392 | $ | 1,069,029 | ||||||||||||
|
Accumulated amortization |
(632,270 | ) | (552,526 | ) | (1,184,796 | ) | (143,227 | ) | (563,823 | ) | (707,050 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total content library, net |
1,920,014 | 46,629 | 1,966,643 | 298,410 | 63,569 | 361,979 | ||||||||||||||||||
|
Current content library, net |
919,709 | — | 919,709 | 181,006 | — | 181,006 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Non-current content library, net |
$ | 1,000,305 | $ | 46,629 | $ | 1,046,934 | $ | 117,404 | $ | 63,569 | $ | 180,973 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| As of December 31, | ||||||||||||||||||||||||
| 2011 | 2010 | |||||||||||||||||||||||
| Streaming | DVD and other | Total | Streaming | DVD and other | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
Content accounts payable |
$ | 905,792 | $ | 18,914 | $ | 924,706 | $ | 136,841 | $ | 31,854 | $ | 168,695 | ||||||||||||
|
Non-current content liabilities |
739,628 | — | 739,628 | 48,179 | — | 48,179 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total content liabilities |
$ | 1,645,420 | $ | 18,914 | $ | 1,664,334 | $ | 185,020 | $ | 31,854 | $ | 216,874 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| As of December 31, | ||||||||||||
| 2011 | 2010 | |||||||||||
| (in thousands) | ||||||||||||
|
Computer equipment |
3 years | $ | 67,090 | $ | 60,289 | |||||||
|
Operations and other equipment |
5 years | 100,306 | 72,368 | |||||||||
|
Software, including internal-use software |
3years | 35,356 | 26,961 | |||||||||
|
Furniture and fixtures |
3years | 17,310 | 11,438 | |||||||||
|
Building |
30 years | 40,681 | 40,681 | |||||||||
|
Leasehold improvements |
Over life of lease | 44,473 | 36,530 | |||||||||
|
Capital work-in-progress |
|
822 | 16,882 | |||||||||
|
|
|
|
|
|||||||||
|
Property and equipment, gross |
|
306,038 | 265,149 | |||||||||
|
Less: Accumulated depreciation |
|
(169,685 | ) | (136,579 | ) | |||||||
|
|
|
|
|
|||||||||
|
Property and equipment, net |
|
$ | 136,353 | $ | 128,570 | |||||||
|
|
|
|
|
|||||||||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Accrued state sales and use tax |
$ | 14,557 | $ | 14,983 | ||||
|
Accrued payroll and employee benefits |
17,763 | 8,520 | ||||||
|
Accrued interest on debt |
2,125 | 2,125 | ||||||
|
Accrued content related costs |
10,774 | 6,950 | ||||||
|
Accrued legal settlement |
9,000 | — | ||||||
|
Current portion of lease financing obligations |
2,319 | 2,083 | ||||||
|
Other |
7,155 | 3,911 | ||||||
|
|
|
|
|
|||||
|
Accrued expenses |
$ | 63,693 | $ | 38,572 | ||||
|
|
|
|
|
|||||
|
|||
|
Year Ending December 31, |
Future Minimum Payments |
|||
| (in thousands) | ||||
|
2012 |
$ | 21,773 | ||
|
2013 |
18,310 | |||
|
2014 |
14,195 | |||
|
2015 |
11,008 | |||
|
2016 |
8,580 | |||
|
Thereafter |
5,326 | |||
|
|
|
|||
|
Total minimum payments |
$ | 79,192 | ||
|
|
|
|||
| (in thousands) | ||||
|
Less than one year |
$ | 797,649 | ||
|
Due after one year and through 3 years |
2,384,373 | |||
|
Due after 3 years and through 5 years |
650,480 | |||
|
Due after 5 years |
74,696 | |||
|
|
|
|||
|
Total streaming content obligations |
$ | 3,907,198 | ||
|
|
|
|||
|
|||
| Year ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Total number of shares repurchased |
900 | 2,606 | 7,371 | |||||||||
|
Dollar amount of shares repurchased |
$ | 199,666 | 210,259 | 324,335 | ||||||||
|
Average price paid per share |
$ | 221.88 | $ | 80.67 | $ | 44.00 | ||||||
|
Range of price paid per share |
$ | 160.11 – 248.78 | $ | 60.23 – $126.01 | $ | 34.70 – $60.00 | ||||||
| Shares Available for Grant |
Options Outstanding | Weighted- Average Remaining Contractual Term (in Years) |
Aggregate Intrinsic Value (in Thousands) |
|||||||||||||||||
| Number of Shares |
Weighted- Average Exercise Price |
|||||||||||||||||||
|
Balances as of December 31, 2008 |
3,192,515 | 5,365,016 | 18.81 | |||||||||||||||||
|
Granted |
(601,665 | ) | 601,665 | 41.65 | ||||||||||||||||
|
Exercised |
— | (1,724,110 | ) | 17.11 | ||||||||||||||||
|
Canceled |
1,133 | (1,133 | ) | 12.69 | ||||||||||||||||
|
Expired |
(716 | ) | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Balances as of December 31, 2009 |
2,591,267 | 4,241,438 | 22.74 | |||||||||||||||||
|
Granted |
(552,765 | ) | 552,765 | 99.58 | ||||||||||||||||
|
Exercised |
— | (1,902,073 | ) | 24.75 | ||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
|
Balances as of December 31, 2010 |
2,038,502 | 2,892,130 | 36.11 | |||||||||||||||||
|
Authorized |
5,700,000 | — | — | |||||||||||||||||
|
Granted |
(724,994 | ) | 724,994 | 154.09 | ||||||||||||||||
|
Exercised |
— | (659,370 | ) | 29.11 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Balances as of December 31, 2011 |
7,013,508 | 2,957,754 | 66.59 | 6.28 | 84,482 | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Vested and exercisable at |
2,957,754 | 66.59 | 6.28 | 84,482 | ||||||||||||||||
|
Options Outstanding and Exercisable |
||||||||||||
|
Exercise Price |
Number of Options |
Weighted-Average Remaining Contractual Life (Years) |
Weighted-Average Exercise Price |
|||||||||
|
$ 1.50 – $11.48 |
310,542 | 2.22 | $ | 8.08 | ||||||||
|
$ 11.57 – $18.14 |
311,566 | 3.25 | 14.65 | |||||||||
|
$ 19.34 – $23.48 |
302,259 | 5.10 | 21.52 | |||||||||
|
$ 23.78 – $27.55 |
300,998 | 4.62 | 26.32 | |||||||||
|
$ 28.13 – $34.75 |
304,110 | 5.40 | 30.91 | |||||||||
|
$ 35.36 – $53.80 |
314,372 | 6.55 | 42.35 | |||||||||
|
$ 58.23 – $75.00 |
308,609 | 9.07 | 67.04 | |||||||||
|
$ 80.09 – $113.25 |
359,849 | 9.29 | 98.03 | |||||||||
|
$134.91 – $237.19 |
298,455 | 9.09 | 196.19 | |||||||||
|
$242.09 – $267.99 |
146,994 | 9.43 | 259.98 | |||||||||
|
|
|
|||||||||||
| 2,957,754 | ||||||||||||
|
|
|
|||||||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Dividend yield |
0% | 0% | 0% | |||||||||
|
Expected volatility |
51% – 65% | 46% – 54% | 46% – 56% | |||||||||
|
Risk-free interest rate |
2.05% – 3.42% | 2.65% – 3.67% | 2.60% – 3.62% | |||||||||
|
Suboptimal exercise factor |
2.17 – 3.64 | 1.78 – 3.28 | 1.73 – 2.01 | |||||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Executives: |
||||||||||||
|
Suboptimal exercise factor |
3.39 – 3.64 | 2.15 – 3.28 | 1.87 – 2.01 | |||||||||
|
Expected term of the option grants (in years) |
8 | 6 | 4 | |||||||||
|
Non-Executives: |
||||||||||||
|
Suboptimal exercise factor |
2.17 – 2.26 | 1.78 – 2.09 | 1.73 – 1.76 | |||||||||
|
Expected term of the option grants (in years) |
5 | 4 | 3 | |||||||||
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Dividend yield |
0 | % | 0% | |||||
|
Expected volatility |
45 | % | 42% – 55% | |||||
|
Risk-free interest rate |
0.24 | % | 0.16% –0.35% | |||||
|
Expected life (in years) |
0.5 | 0.5 | ||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Fulfillment expenses |
$ | 1,500 | $ | 1,145 | $ | 380 | ||||||
|
Marketing |
6,107 | 3,043 | 1,786 | |||||||||
|
Technology and development |
28,922 | 10,189 | 4,453 | |||||||||
|
General and administrative |
25,053 | 13,619 | 5,999 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Stock-based compensation expense before income taxes |
61,582 | 27,996 | 12,618 | |||||||||
|
Income tax benefit |
(22,847 | ) | (11,161 | ) | (5,017 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total stock-based compensation after income taxes |
$ | 38,735 | $ | 16,835 | $ | 7,601 | ||||||
|
|
|
|
|
|
|
|||||||
|
|||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Current tax provision: |
||||||||||||
|
Federal |
$ | 123,406 | $ | 86,002 | $ | 55,104 | ||||||
|
State |
28,657 | 21,803 | 14,900 | |||||||||
|
Foreign |
(70 | ) | — | — | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total current |
151,993 | 107,805 | 70,004 | |||||||||
|
Deferred tax provision: |
||||||||||||
|
Federal |
(14,008 | ) | (1,615 | ) | 6,568 | |||||||
|
State |
(4,589 | ) | 653 | (240 | ) | |||||||
|
|
|
|
|
|
|
|||||||
|
Total deferred |
(18,597 | ) | (962 | ) | 6,328 | |||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
$ | 133,396 | $ | 106,843 | $ | 76,332 | ||||||
|
|
|
|
|
|
|
|||||||
| Year Ended December 31, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in thousands) | ||||||||||||
|
Expected tax expense at U.S. federal statutory rate of 35% |
$ | 125,833 | $ | 93,694 | $ | 67,267 | ||||||
|
State income taxes, net of Federal income tax effect |
15,042 | 15,349 | 10,350 | |||||||||
|
R&D tax credit |
(8,365 | ) | (3,207 | ) | (1,616 | ) | ||||||
|
Other |
886 | 1,007 | 331 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Provision for income taxes |
$ | 133,396 | $ | 106,843 | $ | 76,332 | ||||||
|
|
|
|
|
|
|
|||||||
| As of December 31, | ||||||||
| 2011 | 2010 | |||||||
| (in thousands) | ||||||||
|
Deferred tax assets/(liabilities): |
||||||||
|
Accruals and reserves |
$ | 9,193 | $ | 1,764 | ||||
|
Depreciation |
(17,381 | ) | (5,970 | ) | ||||
|
Stock-based compensation |
39,337 | 19,084 | ||||||
|
R&D credits |
6,335 | 4,351 | ||||||
|
Other |
844 | 461 | ||||||
|
|
|
|
|
|||||
|
Deferred tax assets |
$ | 38,328 | $ | 19,690 | ||||
|
|
|
|
|
|||||
|
Balance as of December 31, 2009 |
$ | 13,244 | ||
|
Increases related to tax positions taken during prior periods |
1,150 | |||
|
Increases related to tax positions taken during the current period |
6,283 | |||
|
|
|
|||
|
Balance as of December 31, 2010 |
$ | 20,677 | ||
|
Decreases related to tax positions taken during prior periods |
(46 | ) | ||
|
Increases related to tax positions taken during the current period |
10,739 | |||
|
Decreases related to expiration of statute of limitations |
(3,237 | ) | ||
|
|
|
|||
|
Balance as of December 31, 2011 |
$ | 28,133 | ||
|
|
|
|
||||||||
| As of/Three Months ended December 31, 2011 | ||||||||||||||||
| Domestic Streaming |
International Streaming |
Domestic DVD |
Consolidated | |||||||||||||
| (in thousands) | ||||||||||||||||
|
Total subscriptions at end of period |
21,671 | 1,858 | 11,165 | — | ||||||||||||
|
Revenues |
$ | 476,334 | $ | 28,988 | $ | 370,253 | $ | 875,575 | ||||||||
|
Cost of revenues and marketing expense |
424,224 | 88,731 | 176,488 | 689,443 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Contribution profit (loss) |
$ | 52,110 | $ | (59,743 | ) | $ | 193,765 | 186,132 | ||||||||
|
|
|
|
|
|
|
|||||||||||
|
Other operating expenses |
124,260 | |||||||||||||||
|
|
|
|||||||||||||||
|
Operating income |
61,872 | |||||||||||||||
|
|
|
|||||||||||||||
|
Other income (expense) |
(5,037 | ) | ||||||||||||||
|
Provision for income taxes |
21,616 | |||||||||||||||
|
|
|
|||||||||||||||
|
Net income |
$ | 35,219 | ||||||||||||||
|
|
|
|||||||||||||||
| As of/Year ended December 31, 2011 | ||||||||||||
| Domestic | International | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
|
Total unique subscribers at end of period |
24,395 | 1,858 | 26,253 | |||||||||
|
Revenues |
$ | 3,121,727 | $ | 82,850 | $ | 3,204,577 | ||||||
|
Cost of revenues and marketing expense |
2,256,540 | 185,999 | 2,442,539 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Contribution profit (loss) |
$ | 865,187 | $ | (103,149 | ) | 762,038 | ||||||
|
|
|
|
|
|||||||||
|
Other operating expenses |
385,970 | |||||||||||
|
|
|
|||||||||||
|
Operating income |
376,068 | |||||||||||
|
|
|
|||||||||||
|
Other income (expense) |
(16,546 | ) | ||||||||||
|
Provision for income taxes |
133,396 | |||||||||||
|
|
|
|||||||||||
|
Net income |
$ | 226,126 | ||||||||||
|
|
|
|||||||||||
| As of/Year ended December 31, 2010 | ||||||||||||
| Domestic | International | Consolidated | ||||||||||
| (in thousands) | ||||||||||||
|
Total unique subscribers at end of period |
19,501 | 509 | 20,010 | |||||||||
|
Revenues |
$ | 2,159,008 | $ | 3,617 | $ | 2,162,625 | ||||||
|
Cost of revenues and marketing expense |
1,635,459 | 15,735 | 1,651,194 | |||||||||
|
|
|
|
|
|
|
|||||||
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Contribution profit (loss) |
$ | 523,549 | $ | (12,118 | ) | 511,431 | ||||||
|
|
|
|
|
|||||||||
|
Other operating expenses |
227,790 | |||||||||||
|
|
|
|||||||||||
|
Operating income |
283,641 | |||||||||||
|
|
|
|||||||||||
|
Other income (expense) |
(15,945 | ) | ||||||||||
|
Provision for income taxes |
106,843 | |||||||||||
|
|
|
|||||||||||
|
Net income |
$ | 160,853 | ||||||||||
|
|
|
|||||||||||
|
|||
| December 31 | September 30 | June 30 | March 31 | |||||||||||||
| (in thousands, except for per share data) | ||||||||||||||||
|
2011 |
||||||||||||||||
|
Total revenues |
$ | 875,575 | $ | 821,839 | $ | 788,610 | $ | 718,553 | ||||||||
|
Gross profit |
300,420 | 285,222 | 298,632 | 280,402 | ||||||||||||
|
Net income (1) |
35,219 | 62,460 | 68,214 | 60,233 | ||||||||||||
|
Net income per share: |
||||||||||||||||
|
Basic |
$ | 0.66 | $ | 1.19 | $ | 1.30 | $ | 1.14 | ||||||||
|
Diluted |
0.64 | 1.16 | 1.26 | 1.11 | ||||||||||||
|
2010 |
||||||||||||||||
|
Total revenues |
$ | 595,922 | $ | 553,219 | $ | 519,819 | $ | 493,665 | ||||||||
|
Gross profit |
205,132 | 208,750 | 204,885 | 186,503 | ||||||||||||
|
Net income |
47,095 | 37,967 | 43,519 | 32,272 | ||||||||||||
|
Net income per share: |
||||||||||||||||
|
Basic |
$ | 0.90 | $ | 0.73 | $ | 0.83 | $ | 0.61 | ||||||||
|
Diluted |
0.87 | 0.70 | 0.80 | 0.59 | ||||||||||||
| (1) | Net income for the three months ended December 31, 2011 includes $9.0 million of expense related to a legal settlement and $9.5 million of expense related to termination benefits associated with the Company's retraction of plans to separate and rebrand the DVD-by-mail service. An additional $1.8 million of expense related to these termination benefits is expected to be recognized in the first quarter of 2012. As of December 31, 2011, $4.9 million of the costs were included in "Accrued expenses" on the Consolidated Balance Sheet to be paid in the first quarter of 2012. |
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