Netflix Q4_13_Letter_to_shareholders.pdf - Fellow Shareholders We ended 2013 with over 44 million members We had higher domestic net additions than in

Netflix Q4_13_Letter_to_shareholders.pdf - Fellow...

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1 January 22, 2014 Fellow Shareholders, We ended 2013 with over 44 million members . We had higher domestic net additions than in 2012, growing international success, and an impressive first slate of original series. We expect to end Q1 with 48 million members . Our summary results, and forecast for Q1, are below. (in millions except per share data) Q4 '12 Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Forecast Domestic: Net Additions 2.05 2.03 0.63 1.29 2.33 2.25 Total Members 27.15 29.17 29.81 31.09 33.42 35.67 Paid Members 25.47 27.91 28.62 29.93 31.71 34.26 Revenue $ 589 $ 639 $ 671 $ 701 $ 741 $ 796 Contribution Profit $ 113 $ 131 $ 151 $ 166 $ 174 $ 198 Contribution Margin 19.2% 20.6% 22.5% 23.7% 23.4% 24.9% International: Net Additions 1.81 1.02 0.61 1.44 1.74 1.60 Total Members 6.12 7.14 7.75 9.19 10.93 12.53 Paid Members 4.89 6.33 7.01 8.08 9.72 11.52 Revenue $ 101 $ 142 $ 166 $ 183 $ 221 $ 267 Contribution Profit (Loss) $ (105) $ (77) $ (66) $ (74) $ (57) $ (42) Contribution Margin -103.2% -54.2% -39.7% -40.6% -25.9% -15.7% Total (including DVD): Revenue $ 945 $ 1,024 $ 1,069 $ 1,106 $ 1,175 Operating Income $ 20 $ 32 $ 57 $ 57 $ 82 Net Income $ 8 $ 3 $ 29 $ 32 $ 48 $ 48 EPS $ 0.13 $ 0.05 $ 0.49 $ 0.52 $ 0.79 $ 0.78 Free Cash Flow $ (51) $ (42) $ 13 $ 7 $ 5 Shares (FD) 59.1 60.1 60.6 61.0 61.3
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2 Domestic Domestic net additions in Q4 of 2.33 million were 14% higher than prior year Q4 at 2.05 million. The healthy y/y growth in net additions was likely fueled by our service improvements, marketing effectiveness, and sales of Internet connected devices. We expect this momentum to continue in Q1 with net additions of 2.25 million to exceed the prior year by about 11%. Running equal to, or slightly above, prior year net additions is a great outcome because it implies that at 33 million domestic members we’re still in the middle section of the S curve of consumer adoption, with years of member growth ahead of us. Our US contribution margin during the quarter increased 420 basis points y/y to 23.4%, as we continued to grow membership and revenue faster than content expense. Over the past 8 quarters since we first broke out the streaming segment, our contribution margin has expanded significantly from the 12.2% posted in Q4’11. Our strong results indicate that a 30% quarterly contribution margin may start being achievable in 2015. At 30%, we’d re-evaluate the right margin growth target, given conditions at that time. To the extent our contribution margin climbs above 30%, it will get harder to keep it growing at 400 basis points per year. Last April we introduced a 4-concurrent stream $11.99 option to begin our evaluation of plan tiering. Since late last year, we have also been testing 1-stream and 3-stream variants, as well as SD/HD variations, at various price points. Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone’s taste. If we do make pricing changes for new members, existing members would get generous grandfathering of their existing plans and prices , so there would be no material near-term revenue increase from moving to this potential broader set of options. We are in no rush to implement such new member plans and are still researching the best way to proceed.
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