LOS GATOS, Calif. -- Netflix, Inc. (Nasdaq: NFLX) today reported results for the third quarter ended September 30, 2010.

"Q3 represents our fourth consecutive quarter of more than one million net subscriber additions. This growth is clearly driven by the strength of our streaming offering. In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail," said Reed Hastings, Netflix co-founder and CEO. "At the same time, the introduction of our streaming offering in Canada in late September has provided us with very encouraging signs regarding the potential for the Netflix service internationally."

Third-Quarter 2010 Financial Highlights

Subscribers. Netflix ended the third quarter of 2010 with approximately 16,933,000 total subscribers, representing 52 percent year-over-year growth from 11,109,000 total subscribers at the end of the third quarter of 2009 and 13 percent sequential growth from 15,001,000 subscribers at the end of the second quarter of 2010.

Net subscriber change in the quarter was an increase of 1,932,000 compared to an increase of 510,000 for the same period of 2009 and an increase of 1,034,000 for the second quarter of 2010.

Gross subscriber additions for the quarter totaled 4,101,000, representing 88 percent year-over-year growth from 2,180,000 gross subscriber additions in the third quarter of 2009 and 34 percent quarter-over-quarter increase from 3,059,000 gross subscriber additions in the second quarter of 2010.

Of the 16,933,000 total subscribers at quarter end, 94 percent, or 15,863,000, were paid subscribers. The other 6 percent, or 1,070,000, were free subscribers. Paid subscribers represented 98 percent of total subscribers at the end of the third quarter of 2009 and 97 percent at the end of the second quarter of 2010.

Revenue for the third quarter of 2010 was $553.2 million, representing 31 percent year-over-year growth from $423.1 million for the third quarter of 2009, and 6 percent sequential growth from $519.8 million for the second quarter of 2010.

Gross margin(1) for the third quarter of 2010 was 37.7 percent compared to 34.9 percent for the third quarter of 2009 and 39.4 percent for the second quarter of 2010.

GAAP net income for the third quarter of 2010 was $38.0 million, or $0.70 per diluted share compared to GAAP net income of $30.1 million, or $0.52 per diluted share, for the third quarter of 2009 and GAAP net income of $43.5 million, or $0.80 per diluted share, for the second quarter of 2010. GAAP net income grew 26 percent on a year-over-year basis and GAAP EPS grew 35 percent on a year-over-year basis.

Percentage of subscribers who watched instantly more than 15 minutes of a TV episode or movie in the third quarter of 2010 was 66 percent compared to 41 percent for the same period of 2009 and 61 percent for the second quarter of 2010. In Q4 a majority of Netflix subscribers will watch more content streamed from Netflix than delivered on DVD. With that transition in the business from mostly DVD to mostly streaming, this will be the last quarter the company will report this metric.

Subscriber acquisition cost(2) for the third quarter of 2010 was $19.81 per gross subscriber addition compared to $26.86 for the same period of 2009 and $24.37 for the second quarter of 2010.

Churn(3) for the third quarter of 2010 was 3.8 percent compared to 4.4 percent for the third quarter of 2009 and 4.0 percent for the second quarter of 2010. Churn includes free subscribers as well as paying subscribers who elect not to renew their monthly subscription service during the quarter.

Free cash flow(4) for the third quarter of 2010 was $7.8 million compared to $25.5 million for the third quarter of 2009 and $34.2 million for the second quarter of 2010.

Trailing twelve-month free cash flow for the third quarter of 2010 was $109.8 million compared to $117.9 million for the third quarter of 2009 and $127.5 million for the second quarter of 2010.

Cash provided by operating activities for the third quarter of 2010 was $42.2 million compared to $78.3 million for the third quarter of 2009 and $60.3 million for the second quarter of 2010.

Business Outlook

The Company's performance expectations for the fourth quarter of 2010 and full-year 2010 are as follows:

Fourth-Quarter 2010

* Ending subscribers of 19.0 million to 19.7 million, up from 17.7 million to 18.5 million
* Revenue of $586 million to $598 million, versus $580 million to $596 million
* GAAP net income of $32 million to $40 million, unchanged
* GAAP EPS of $0.59 to $0.74 per diluted share, unchanged


Full-Year 2010

* Ending subscribers of 19.0 million to 19.7 million, up from 17.7 million to 18.5 million
* Revenue of $2.15 billion to $2.16 billion, versus $2.14 billion to $2.16 billion
* GAAP net income of $146 million to $154 million, versus $141 million to $156 million
* GAAP EPS of $2.68 to $2.83 per diluted share, up from $2.58 to $2.86 per diluted share

 

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James Cameron recently revealed how he would like to approach two sequels to Avatar:

"Our plan right now is to do two and three as a single large production and release them a year apart," says Cameron, "In order to do that, we have to refine our technical processes beyond the end of where we were finishing Avatar one a year ago. We need to future-proof ourselves out five or six years to the end of the third film."

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