NFLX 10-Q Quarterly Report March 31, 2014

NETFLIX INC

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10-Q 1 nflx-33114x10qxdoc.htm 10-Q NFLX-3.31.14-10Q-DOC

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014


o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35727

Netflix, Inc.

(Exact name of Registrant as specified in its charter)



Delaware	77-0467272
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

100 Winchester Circle, Los Gatos, California 95032

(Address and zip code of principal executive offices)

(408) 540-3700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

As of March 31, 2014 , there were 59,940,336 shares of the registrant’s common stock, par value $0.001, outstanding.

Table of Contents



		Page
	Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Cash Flows	5
	Consolidated Balance Sheets	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	28
	Part II. Other Information	28
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 6.	Exhibits	29
Signatures		30
Exhibit Index		31

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NETFLIX, INC.

Consolidated Statements of Operations

(unaudited)

(in thousands, except per share data)



	Three Months Ended
	March 31, 2014			March 31, 2013
Revenues	$	1,270,089		$	1,023,961
Cost of revenues	869,186			736,952
Marketing	137,098			119,086
Technology and development	110,310			91,975
General and administrative	55,900			44,126
Operating income	97,595			31,822
Other income (expense):
Interest expense	(10,052		)	(6,740		)
Interest and other income (expense)	1,401			977
Loss on extinguishment of debt	—			(25,129		)
Income before income taxes	88,944			930
Provision (benefit) for income taxes	35,829			(1,759		)
Net income	$	53,115		$	2,689
Earnings per share:
Basic	$	0.89		$	0.05
Diluted	$	0.86		$	0.05
Weighted-average common shares outstanding:
Basic	59,817			55,972
Diluted	61,548			60,146

See accompanying notes to the consolidated financial statements.

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NETFLIX, INC.

Consolidated Statements of Comprehensive Income

(unaudited)

(in thousands)



	Three Months Ended
	March 31, 2014		March 31, 2013
Net income	$	53,115	$	2,689
Other comprehensive income (loss):
Foreign currency translation adjustments	461		(2,289		)
Change in unrealized gains (losses) on available-for-sale securities, net of tax of $291 and $(212), respectively	467		(339		)
Total other comprehensive income (loss)	928		(2,628		)
Comprehensive income	$	54,043	$	61

See accompanying notes to the consolidated financial statements.

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NETFLIX, INC.

Consolidated Statements of Cash Flows

(unaudited)

(in thousands)



	Three Months Ended
	March 31, 2014			March 31, 2013
Cash flows from operating activities:
Net income	$	53,115		$	2,689
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Additions to streaming content library	(749,399		)	(591,941		)
Change in streaming content liabilities	42,244			9,700
Amortization of streaming content library	600,735			485,740
Amortization of DVD content library	16,121			18,237
Depreciation and amortization of property, equipment and intangibles	12,382			12,051
Stock-based compensation expense	25,825			17,746
Excess tax benefits from stock-based compensation	(32,732		)	(11,615		)
Other non-cash items	2,196			1,750
Loss on extinguishment of debt	—			25,129
Deferred taxes	(13,103		)	(6,748		)
Changes in operating assets and liabilities:
Other current assets	35,066			(5,727		)
Accounts payable	22,812			17,019
Accrued expenses	(442		)	(4,132		)
Deferred revenue	14,248			9,406
Other non-current assets and liabilities	7,291			8,446
Net cash provided by (used in) operating activities	36,359			(12,250		)
Cash flows from investing activities:
Acquisition of DVD content library	(14,914		)	(21,193		)
Purchases of property and equipment	(13,334		)	(12,118		)
Other assets	295			4,050
Purchases of short-term investments	(60,546		)	(235,623		)
Proceeds from sale of short-term investments	143,048			81,228
Proceeds from maturities of short-term investments	3,090			4,420
Net cash provided by (used in) investing activities	57,639			(179,236		)
Cash flows from financing activities:
Proceeds from issuance of common stock	32,448			39,146
Proceeds from issuance of debt	400,000			500,000
Issuance costs	(6,727		)	(9,414		)
Redemption of debt	—			(219,362		)
Excess tax benefits from stock-based compensation	32,732			11,615
Principal payments of lease financing obligations	(267		)	(403		)
Net cash provided by financing activities	458,186			321,582
Effect of exchange rate changes on cash and cash equivalents	301			(2,336		)
Net increase in cash and cash equivalents	552,485			127,760
Cash and cash equivalents, beginning of period	604,965			290,291
Cash and cash equivalents, end of period	$	1,157,450		$	418,051

See accompanying notes to the consolidated financial statements.

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NETFLIX, INC.

Consolidated Balance Sheets

(in thousands, except share and par value data)



	As of
	March 31, 2014		December 31, 2013
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,157,450	$	604,965
Short-term investments	510,793		595,440
Current content library, net	1,771,410		1,706,421
Other current assets	147,131		151,937
Total current assets	3,586,784		3,058,763
Non-current content library, net	2,179,474		2,091,071
Property and equipment, net	133,473		133,605
Other non-current assets	148,375		129,124
Total assets	$	6,048,106	$	5,412,563
Liabilities and Stockholders’ Equity
Current liabilities:
Current content liabilities	$	1,844,897	$	1,775,983
Accounts payable	133,883		108,435
Accrued expenses	54,858		54,018
Deferred revenue	230,015		215,767
Total current liabilities	2,263,653		2,154,203
Non-current content liabilities	1,321,879		1,345,590
Long-term debt	900,000		500,000
Other non-current liabilities	84,216		79,209
Total liabilities	4,569,748		4,079,002
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $0.001 par value; 160,000,000 shares authorized at March 31, 2014 and December 31, 2013; 59,940,336 and 59,607,001 issued and outstanding at March 31, 2014 and December 31, 2013, respectively	60		60
Additional paid-in capital	868,195		777,441
Accumulated other comprehensive income	4,503		3,575
Retained earnings	605,600		552,485
Total stockholders’ equity	1,478,358		1,333,561
Total liabilities and stockholders’ equity	$	6,048,106	$	5,412,563

See accompanying notes to the consolidated financial statements.

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NETFLIX, INC.

Notes to Consolidated Financial Statements

(unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying consolidated interim financial statements of Netflix, Inc. and its wholly owned subsidiaries (the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States (“U.S.”) and are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (the “SEC”) on February 3, 2014. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant items subject to such estimates and assumptions include the amortization policy for the streaming content library; the recognition and measurement of income tax assets and liabilities; and the valuation of stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances. On a regular basis, the Company evaluates the assumptions, judgments and estimates. Actual results may differ from these estimates.

The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. The interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 . Interim results are not necessarily indicative of the results for a full year.

The Company is organized into three operating segments: Domestic streaming, International streaming and Domestic DVD. A majority of the Company’s revenues are generated in the United States, and substantially all of the Company’s long-lived tangible assets are held in the United States. The Company’s revenues are derived from monthly membership fees.

There have been no material changes in the Company’s significant accounting policies as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 .

2. Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation in the consolidated financial statements.

Costs of revenues in the amount of $10.1 million for the three months ended March 31, 2013 related to free-trial periods that were previously allocated to “Marketing” on the Consolidated Statements of Operations have been reallocated to “Cost of revenues”. There was no impact to contribution profit or net income in any period presented and there was no impact to the Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

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3. Earnings Per Share

Basic earnings per share is computed using the weighted-average number of outstanding shares of common stock during the period. Diluted earnings 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 Senior Convertible Notes (prior to the conversion of such notes in April 2013) and incremental shares issuable upon the assumed exercise of stock options. The computation of earnings per share is as follows:



	Three Months Ended
	March 31, 2014		March 31, 2013
	(in thousands, except per share data)
Basic earnings per share:
Net income	$	53,115	$	2,689
Shares used in computation:
Weighted-average common shares outstanding	59,817		55,972
Basic earnings per share	$	0.89	$	0.05

Diluted earnings per share:
Net income	$	53,115	$	2,689
Senior Convertible Notes interest expense, net of tax	—		49
Numerator for diluted earnings per share	$	53,115	$	2,738
Shares used in computation:
Weighted-average common shares outstanding	59,817		55,972
Senior Convertible Notes shares	—		2,331
Employee stock options	1,731		1,843
Weighted-average number of shares	61,548		60,146
Diluted earnings per share	$	0.86	$	0.05

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:



	Three Months Ended
	March 31, 2014	March 31, 2013
	(in thousands)
Employee stock options	41	450

4. 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 tables summarize, 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:

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	As of March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	1,069,050	$	—	$	—		$	1,069,050
Level 1 securities:
Money market funds	94,103		—		—			94,103
Level 2 securities:
Corporate debt securities	328,233		1,333		(218		)	329,348
Government securities	136,374		319		(9		)	136,684
Asset backed securities	3,382		4		—			3,386
Certificate of deposits	23,425		—		—			23,425
Agency securities	17,950		—		—			17,950
Total (1)	$	1,672,517	$	1,656	$	(227	)	$	1,673,946



	As of December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(in thousands)
Cash	$	483,959	$	—	$	—		$	483,959
Level 1 securities:
Money market funds	126,208		—		—			126,208
Level 2 securities:
Corporate debt securities	316,465		1,245		(654		)	317,056
Government securities	143,812		287		(18		)	144,081
Asset and mortgage-backed securities	93,118		229		(418		)	92,929
Certificate of deposits	23,425		—		—			23,425
Agency securities	17,951		—		(2		)	17,949
Total (2)	$	1,204,938	$	1,761	$	(1,092	)	$	1,205,607


(1)	Includes $1,157.5 million that is included in cash and cash equivalents, $510.8 million included in short-term investments and $5.7 million of restricted cash that is included in other non-current assets related to workers compensation deposits.


(2)	Includes $605.0 million that is included in cash and cash equivalents, $595.4 million included in short-term investments and $5.2 million of restricted cash that is included in other non-current assets related to workers compensation deposits.

Fair value is a market-based measurement that is 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 6 to the consolidated financial statements for further information regarding the fair value of the Company’s debt instruments.

There were no investments in a material unrealized loss position as of March 31, 2014 or December 31, 2013, respectively. There were no material other-than-temporary impairments or credit losses related to available-for-sale securities in the three months ended March 31, 2014 and 2013 . In addition, there were no material gross realized gains or losses in the three months ended March 31, 2014 and 2013 .

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The estimated fair value of short-term investments by contractual maturity as of March 31, 2014 is as follows:



	(in thousands)
Due within one year	$	204,050
Due after one year and through 5 years	306,743
Due after 5 years and through 10 years	—
Due after 10 years	—
Total short-term investments	$	510,793

5. Balance Sheet Components

Content Library

Content library consisted of the following:



	As of
	March 31, 2014			December 31, 2013
	(in thousands)
Total content library, gross	$	6,784,831		$	6,474,688
Accumulated amortization	(2,833,947		)	(2,677,196		)
Total content library, net	3,950,884			3,797,492
Current content library, net	1,771,410			1,706,421
Non-current content library, net	$	2,179,474		$	2,091,071

Property and Equipment, Net

Property and equipment and accumulated depreciation consisted of the following:



		As of
		March 31, 2014			December 31, 2013
		(in thousands)
Computer equipment	3 years	$	110,411		$	102,867
Operations and other equipment	5 years	96,180			96,361
Software	3 years	35,589			36,439
Furniture and fixtures	3 years	22,595			21,011
Building	30 years	40,681			40,681
Leasehold improvements	Over life of lease	53,064			51,194
Capital work-in-progress		9,584			8,643
Property and equipment, gross		368,104			357,196
Less: Accumulated depreciation		(234,631		)	(223,591		)
Property and equipment, net		$	133,473		$	133,605

6. 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 was considered a related party transaction. At any time following May 28, 2012, the Company could have elected to cause the conversion of the Convertible Notes into shares of the Company’s common stock when specified conditions were satisfied, including that the daily volume weighted-average price of the Company’s common stock was equal to or greater than $111.54 for at least 50 trading days during a 65 trading day period prior to the conversion date.

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In April 2013, after all specified conditions were satisfied, the Company elected to cause the conversion of all outstanding Convertible Notes with an aggregate principal amount of $200.0 million in accordance with the terms of the Indenture governing such notes. Pursuant to this conversion, the Company issued 2.3 million shares of common stock to the holders of the Convertible Notes at a conversion ratio of 11.6553 . The fair market value of one share of common stock on the date of conversion was $216.99 per share.

5.375% Senior Notes

In February 2013, the Company issued $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the " 5.375% Notes"). The 5.375% Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at a rate of 5.375% per annum on February 1 and August 1 of each year, commencing on August 1, 2013. The 5.375% 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. The Company may redeem the 5.375% Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest plus a make-whole payment equivalent to the present value of the remaining interest payments through maturity.

The 5.375% Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. At March 31, 2014 and December 31, 2013 the Company was in compliance with these covenants.

In the first quarter of 2013, the Company used $224.5 million of the net proceeds of the 5.375% Notes to redeem the outstanding $200.0 million aggregate principal amount of 8.50% Senior Notes due 2017 (the “ 8.50% Notes”) and pursuant to the make-whole provision in the Indenture governing the 8.50% Notes, paid a $19.4 million premium and $5.1 million of accrued and unpaid interest. The Company recognized a loss on extinguishment of debt of $25.1 million related to redemption of the 8.50% Notes which included the write off of unamortized debt issuance costs of $4.2 million .

Based on quoted market prices in less active markets (a Level 2 input for this financial instrument), the fair value of the 5.375% Notes as of March 31, 2014 and December 31, 2013 was approximately $525.0 million and $506.3 million , respectively.

5.750% Senior Notes

In February 2014, the Company issued $400.0 million aggregate principal amount of 5.750% Senior Notes due 2024 (the " 5.750% Notes"). The 5.750% Notes were issued at par and are senior unsecured obligations of the Company. Interest is payable semi-annually at a rate of 5.750% per annum on March 1 and September 1 of each year, commencing on September 1, 2014. The 5.750% 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. The Company may redeem the 5.750% Notes prior to maturity in whole or in part at an amount equal to the principal amount thereof plus accrued and unpaid interest plus a make-whole payment equivalent to the present value of the remaining interest payments through maturity.

The 5.750% Notes include, among other terms and conditions, limitations on the Company's ability to create, incur or allow certain liens; enter into sale and lease-back transactions; create, assume, incur or guarantee additional indebtedness of the Company's subsidiaries; and consolidate or merge with, or convey, transfer or lease all or substantially all of the Company's and its subsidiaries assets, to another person. At March 31, 2014 the Company was in compliance with these covenants.

The net proceeds to the Company were $392.9 million . Debt issuance costs of $7.1 million (of which $0.4 million were unpaid as of March 31, 2014) were recorded in "Other non-current assets" on the Consolidated Balance Sheets and are amortized over the term of the notes as "Interest expense" on the Consolidated Statements of Operations.

Based on quoted market prices in less active markets (a Level 2 input for this financial instrument), the fair value of the 5.750% Notes as of March 31, 2014 was approximately $414.0 million .

7. Stockholders’ Equity

Stock Option Plan

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 March 31, 2014 , 3.3 million shares were reserved for future grants under the 2011 Stock Plan.

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A summary of the activities related to the Company’s stock option plans is as follows:



			Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value (in Thousands)
Balances as of December 31, 2013	3,406,317		3,526,898		$	95.25
Granted	(116,439	)	116,439		407.31
Exercised			(333,335	)	97.34
Balances as of March 31, 2014	3,289,878		3,310,002		106.01		5.98	$	821,101
Vested and exercisable at March 31, 2014			3,310,002		106.01		5.98	$	821,101

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the first quarter of 2014 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2014 . This amount changes based on the fair market value of the Company’s common stock. The total intrinsic value of options exercised for the three months ended March 31, 2014 and 2013 was $101.5 million and $50.0 million , respectively.

Cash received from option exercises for the three months ended March 31, 2014 and 2013 was $32.4 million and $39.1 million , respectively.

Stock-Based Compensation

The following table summarizes the assumptions used to value stock option grants using the lattice-binomial model:



	Three Months Ended
	March 31, 2014		March 31, 2013
Dividend yield	—	%	—	%
Expected volatility	48	%	54	%
Risk-free interest rate	2.83	%	1.87	%
Suboptimal exercise factor	2.66 - 4.07		2.33 - 3.59

The Company bifurcates its option grants into two employee groupings (executive and non-executive) and considers several factors, including the historical option exercise behavior, the contractual terms and vesting periods of the options granted, in determining the suboptimal exercise factor.

The weighted-average fair value of employee stock options granted during the three months ended March 31, 2014 and 2013 was $221.79 and $72.71 per share, respectively.

Stock-based compensation expense related to stock option plans was $25.8 million and $17.7 million for the three months ended March 31, 2014 and 2013 , respectively. The total income tax benefit recognized in the income statement related to stock option plans was $9.9 million and $6.8 million for the three months ended March 31, 2014 and 2013 , respectively.

8. Accumulated Other Comprehensive Income

The following table summarizes the changes in accumulated balances of other comprehensive income, net of tax for the three months ended March 31, 2014 :

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	Foreign currency		Change in unrealized gains on available-for-sale securities			Total
	(in thousands)
Balance as of December 31, 2013	$	3,153	$	422		$	3,575
Other comprehensive income before reclassifications	461		648			1,109
Amounts reclassified from accumulated other comprehensive income	—		(181		)	(181		)
Net increase in other comprehensive income	461		467			928
Balance as of March 31, 2014	$	3,614	$	889		$	4,503

All amounts reclassified from accumulated other comprehensive income were related to gains (losses) on available-for-sale securities. These reclassifications impacted "Interest and other income (expense)" on the Consolidated Statements of Operations.

9. Income Taxes

The effective tax rates (benefit) for the three months ended March 31, 2014 and 2013 were 40% and (189)% , respectively. The effective tax rate for the three months ended March 31, 2014 differed from the federal statutory rate primarily due to state taxes, foreign taxes and nondeductible expenses. The effective tax (benefit) for the three months ended March 31, 2013 differed from the federal statutory rate primarily due to a discrete benefit recorded for Federal R&D credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 (H.R. 8) was signed into law which retroactively extended the Federal R&D credit from January 1, 2012 through December 31, 2013. As a result, the Company recognized the retroactive benefit of the 2012 Federal R&D credit of approximately $3.1 million as a discrete item in the first quarter of 2013, the period in which the legislation was enacted.

The increase in our effective tax rates for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 was primarily attributable to the expiration of the Federal R&D tax credit on December 31, 2013 and from the significant effective tax (benefit) resulting from the discrete benefit recorded for the retroactive benefit of the 2012 Federal R&D credit in the three months ended March 31, 2013.

Gross unrecognized tax benefits were $73.4 million and $68.2 million as of March 31, 2014 and December 31, 2013, respectively. The gross unrecognized tax benefits, if recognized by the Company, will result in a reduction of approximately $61.1 million to the provision for income taxes thereby favorably impacting the Company’s effective tax rate. The Company’s unrecognized tax benefits are classified as “Other non-current liabilities” on the Consolidated Balance Sheets. The Company includes interest and penalties related to unrecognized tax benefits within the "Provision (benefit) for income taxes" on the Consolidated Statements of Operations. As of March 31, 2014 , the total amount of gross interest and penalties accrued was $4.1 million , and is classified as “Other non-current liabilities” on the Consolidated Balance Sheets.

Deferred tax assets include $19.9 million and $21.5 million classified as “Other current assets” and $83.5 million and $69.1 million classified as “Other non-current assets” on the Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 , 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 March 31, 2014 and December 31, 2013 , it was considered more likely than not that substantially all deferred tax assets would be realized, and no significant valuation allowance was recorded.

Income tax benefits attributable to the exercise of employee stock options of $32.5 million and $11.3 million , during the three months ended March 31, 2014 and 2013 , respectively, were recorded directly to "Additional paid-in capital" on the Consolidated Balance Sheets.

The Company files U.S. federal, state and foreign tax returns. The Company is currently under examination by the IRS for the years 2008 through 2011. The IRS has completed its Field Exam of the 2008 and 2009 federal tax returns and has issued a Revenue Agent Report with a proposed assessment primarily related to the Company's R&D Credits claimed in those years. The Company has filed a protest against the proposed assessment and is currently awaiting the commencement of the IRS Appeals process. The IRS Field Exam of the 2010 and 2011 federal tax returns is in process. The 2012 federal tax return remains subject to examination by the IRS.

The Company is also currently under examination by the state of California for the years 2006 and 2007. California has completed its Field Exam of the 2006 and 2007 California tax returns and has issued a Notice of Proposed Assessment primarily related to our R&D Credits claimed in those years. The Company has filed a protest against the proposed assessment and is currently awaiting the commencement of the Protest process with the Franchise Tax Board. The years 1997 through 2005, as well as 2008 through 2012, remain subject to examination by the state of California.

The Company is currently not under examination in any foreign jurisdiction. The years 2011 and 2012 remain subject to examination by foreign jurisdictions.

Given the potential outcome of the current examinations, as well as the impact of the current examination 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

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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.

10. Commitments and Contingencies

Streaming Content

At March 31, 2014 , the Company had $7.1 billion of obligations comprised of $1.8 billion included in "Current content liabilities" and $1.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $4.0 billion of obligations that are not reflected on the Consolidated Balance Sheets.

At December 31, 2013 , the Company had $7.3 billion of obligations comprised of $1.8 billion included in "Current content liabilities" and $1.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $4.2 billion of obligations that are not reflected on the Consolidated Balance Sheets.

The expected timing of payments for these streaming content obligations is as follows:



	As of
	March 31, 2014		December 31, 2013
	(in thousands)
Less than one year	$	3,055,127	$	2,972,325
Due after one year and through 3 years	3,393,761		3,266,907
Due after 3 years and through 5 years	630,518		929,645
Due after 5 years	43,803		83,284
Total streaming content obligations	$	7,123,209	$	7,252,161

A streaming content obligation is incurred at the time the Company signs a license agreement to obtain future titles. Once a title becomes available, a content liability is generally recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and / or fees for which are not yet determinable as of the reporting date. Because the amount is not reasonably estimable, the Company does not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant and the expected timing of payments could range from less than one year to more than five years.

The Company has entered into certain licenses with performing rights organizations ("PROs"), and is currently involved in negotiations with other PROs, that hold certain rights to music and other entertainment works "publicly performed" in connection with streaming content into various territories. Accruals for estimated license fees are recorded and then adjusted based on any change in estimates. These amounts are included in the streaming content obligations. The results of these negotiations are uncertain and may be materially different from management's estimates.

Legal Proceedings

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 13, 2012, the first of three purported shareholder class action lawsuits was filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. Two additional purported shareholder class action lawsuits were filed in the same court on January 27, 2012 and February 29, 2012 alleging substantially similar claims. These lawsuits were consolidated into In re Netflix, Inc., Securities Litigation , Case No. 3:12-cv-00225-SC, and the Court selected lead plaintiffs. On June 26, 2012, lead plaintiffs filed a consolidated complaint which alleged violations of the federal securities laws. The Court dismissed the consolidated complaint with leave to amend on February 13, 2013. Lead plaintiffs filed a first amended consolidated complaint on March 22, 2013. The Court dismissed the first amended consolidated complaint with prejudice on August 20, 2013, and judgment was entered on September 27, 2013. Lead plaintiffs filed a motion to alter or amend the judgment and requested leave to file a second amended complaint on October 25, 2013. On January 17, 2014, the Court denied that motion. On February 18, 2014, plaintiffs appealed that decision to the Unites States Court of Appeals for the Ninth Circuit.

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On November 23, 2011, the first of six purported shareholder derivative suits was filed in the Superior Court of California, Santa Clara County, against the Company and certain of its officers and directors. Five additional purported shareholder derivative suits were subsequently filed: two in the Superior Court of California, Santa Clara County on February 9, 2012 and May 2, 2012; and three in the United States District Court for the Northern District of California on February 13, 2012, February 24, 2012 and April 2, 2012. The purported shareholder derivative suits filed in the Northern District of California have been voluntarily dismissed. On July 5, 2012, the purported shareholder derivative suits filed in Santa Clara County were consolidated into In re Netflix, Inc. Shareholder Derivative Litigation , Case No. 1-12-cv-218399, and lead counsel was appointed. A consolidated complaint was filed on December 4, 2012, with plaintiffs seeking compensatory damages and other relief. The consolidated complaint alleges, among other things, that certain of the Company's current and former officers and directors breached their fiduciary duties, issued false and misleading statements primarily regarding the Company's streaming business, violated accounting rules concerning segment reporting, violated provisions of the California Corporations Code, and wasted corporate assets. The consolidated complaint further alleges that the defendants caused the Company to buy back stock at artificially inflated prices to the detriment of the Company and its shareholders while contemporaneously selling personally held Company stock. The Company filed a demurrer to the consolidated complaint and a motion to stay the derivative litigation in favor of the related federal securities class action on February 4, 2013. On June 21, 2013, the Court granted the motion to stay the derivative litigation pending resolution of the related federal securities class action. 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.

Indemnification

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 consolidated financial statements with respect to these indemnification obligations.

11. Segment Information

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 revenues and contribution profit (loss) for each of the reportable segments. Contribution profit (loss) is defined as revenues less cost of revenues and marketing expenses directly incurred by the segment.

The Domestic and International streaming segments derive revenues from monthly membership fees for services consisting solely of streaming content. The Domestic DVD segment derives revenues from monthly membership fees for services consisting solely of DVD-by-mail. Revenues and the related payment card fees are attributed to the operating segment based on the nature of the underlying membership (streaming or DVD) and the geographic region from which the membership originates. There are no internal revenue transactions between the Company’s reporting segments.

Cost of revenues are primarily attributed to the operating segment based on the amounts directly incurred by the segment to obtain content and deliver it to the specific region. Marketing expenses are primarily comprised of advertising expenses which are generally included in the segment in which the expenditures are directly incurred.

The Company's long-lived tangible assets were located as follows:

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	As of
	March 31, 2014		December 31, 2013
	(in thousands)
United States	$	126,330	$	126,455
International	7,143		7,150

The following tables represent segment information for the three months ended March 31, 2014 and 2013:



	As of/ Three months ended March 31, 2014
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total members at end of period (1)	35,674		12,683			6,652		—
Revenues	$	798,617	$	267,118		$	204,354	$	1,270,089
Cost of revenues	517,094		245,267			106,825		869,186
Marketing	80,258		56,840			—		137,098
Contribution profit (loss)	$	201,265	$	(34,989	)	$	97,529	$	263,805
Other operating expenses								166,210
Operating income								97,595
Other income (expense)								(8,651		)
Provision for income taxes								35,829
Net income								$	53,115



	As of/ Three months ended March 31, 2013
	Domestic Streaming		International Streaming			Domestic DVD		Consolidated
	(in thousands)
Total members at end of period (1)	29,174		7,142			7,983		—
Revenues	$	638,649	$	142,019		$	243,293	$	1,023,961
Cost of revenues	440,334		166,892			129,726		736,952
Marketing	66,965		52,047			74		119,086
Contribution profit (loss)	$	131,350	$	(76,920	)	$	113,493	$	167,923
Other operating expenses								136,101
Operating income								31,822
Other income (expense)								(30,892		)
Benefit for income taxes								(1,759		)
Net income								$	2,689

The following table represents the amortization of the content library:



	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
Three months ended March 31,	(in thousands)
2014	$	386,315	$	214,420	$	16,121	$	616,856
2013	335,748		149,992		18,237		503,977

The following table represents total content library, net:

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	Domestic Streaming		International Streaming		Domestic DVD		Consolidated
	(in thousands)
As of March 31, 2014	$	3,009,260	$	918,979	$	22,645	$	3,950,884
As of December 31, 2013	2,973,023		804,690		19,779		3,797,492

(1)

A membership (also referred to as a subscription) is defined as the right to receive either the Netflix streaming service or Netflix DVD service. Memberships are assigned to territories based on the geographic location used at time of sign up as determined by the Company's internal systems, which utilize industry standard geo-location technology. The Company offers free-trial memberships to new and certain rejoining members. For inclusion in the definition of a member in the above metrics, a method of payment is required to be provided even during the free-trial period. Total members therefore include those who are on a free-trial and have provided a method of payment. A membership would be canceled and cease to be reflected in the above metrics as of the effective cancellation date. Voluntary cancellations become effective at the end of the monthly membership period, while involuntary cancellation of the service, as a result of a failed method of payment, becomes effective immediately.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to statements regarding: our core strategy; investments in content, including original content; international expansion and investments related thereto; cash use in connection with content acquisitions and international expansion; deferred tax assets; future pricing changes; accessing and obtaining additional capital and future contractual obligations. These forward-looking statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those included in forward-looking statements. These forward-looking statements can be identified by our use of words such as "anticipate," "expect," "will," "may" and derivations thereof. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (“SEC”) on February 3, 2014, in particular the risk factors discussed under the heading “Risk Factors” in Part I, Item IA.

We assume no obligation to revise or publicly release any revision to any forward-looking statements contained in this Quarterly Report on Form 10-Q, unless required by law.

Investors and others should note that we announce material financial information to our investors using our investor relations website (http://ir.netflix.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our members and the public about our company, our services and other issues. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the United States ("U.S.") social media channels listed on our investor relations website.

Overview

We are the world’s leading Internet television network with more than 48 million streaming members in over 40 countries enjoying more than two billion hours of TV shows and movies per month, including original series. Our members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Additionally, in the U.S., our members can receive DVDs delivered quickly to their homes.

We are a pioneer in the Internet delivery of TV shows and movies, launching our streaming service in 2007. Since this launch, we have developed an ecosystem for Internet-connected devices and have licensed increasing amounts of content that enable consumers to enjoy TV shows and movies directly on their TVs, computers and mobile devices. As a result of these efforts, we have experienced growing consumer acceptance of and interest in the delivery of TV shows and movies directly over the Internet. Historically, our acquisition of new members has been seasonal with the first and fourth quarters representing our strongest net member additions and our second quarter representing the lowest net member additions in a calendar year.

Our core strategy is to grow our streaming subscription business domestically and internationally. We are continuously improving our members' experience - expanding our streaming content, with a focus on programming an overall mix of content that delights our customers, enhancing our user interface and extending our streaming service to even more Internet-connected devices while staying within the parameters of our consolidated net income and operating segment contribution profit (loss) targets.

Our current view is to increase the monthly membership fee for our streaming plans by one to two dollars, depending on the country, in the second quarter of 2014 for new members only. Existing members would stay at current pricing for a generous time period. We believe these changes will enable us to acquire more content and deliver an even better streaming experience.

Results of Operations

The following represents our consolidated performance highlights:



	Three Months Ended					Change
	March 31, 2014		March 31, 2013			Q1'14 vs. Q1'13
	(in thousands)
Revenues	$	1,270,089	$	1,023,961		24	%
Operating income	97,595		31,822			207	%
Net income	53,115		2,689			1,875	%
Free cashflow (1)	8,406		(41,511		)	120	%



(1)		See “Liquidity and Capital Resources” for a definition of “free cash flow” and a reconciliation of “free cash flow” to “net cash provided by operating activities.”

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Consolidated revenues for the three months ended March 31, 2014 increased $246.1 million as compared to the three months ended March 31, 2013 due to growth in streaming members, both internationally and domestically. Operating income and net income increased $65.8 million and $50.4 million, respectively, due to the increase in revenues, partially offset by an increase in the cost of revenues due to increased content licensing expenses relating to our existing and new streaming content.

The excess of net income over free cash flow has remained flat from $44.2 million for the three months ended March 31, 2013 to $44.7 million for the three months ended March 31, 2014, primarily due to the increase in consolidated revenues offset by an increase in cash payments for streaming content.

The following represents the key elements to our segment results of operations:


•	We define contribution profit as revenues less cost of revenues and marketing expenses. We believe this is an important measure of our operating segment performance as it represents each segment's performance before discrete global corporate costs.

•

For the Domestic and International streaming segments, content licensing expenses, which include the amortization of the streaming content library and other expenses associated with the licensing of streaming content, represent the vast majority of cost of revenues. Streaming content rights are generally specific to a geographic region and accordingly our international expansion will require us to obtain additional streaming content licenses to support new international markets. Other cost of revenues such as content delivery expenses, customer service and payment processing fees tend to be lower as a percentage of total cost of revenues as compared to content licensing expenses. We utilize both our own and third-party content delivery networks to help us efficiently stream a high volume of content to our members over the Internet. Content delivery expenses, therefore, also include equipment costs related to our streaming content delivery network ("Open Connect") and all third-party costs associated with delivering streaming content over the Internet. Cost of revenues in the Domestic DVD segment consists primarily of content delivery, expenses related to the acquisition of content, including amortization of DVD content library and revenue sharing expenses, and other expenses associated with our DVD processing and customer service centers. Content delivery expenses for the Domestic DVD segment consist of the postage costs to mail DVDs to and from our paying members and the packaging and label costs for the mailers.

•

For the Domestic and International streaming segments, marketing expenses consist primarily of advertising expenses and payments made to our affiliates and consumer electronics partners. Advertising expenses include promotional activities such as television and online advertising. Payments to our affiliates and device partners include fixed fee and /or revenue sharing payments. Marketing costs are primarily incurred by our Domestic and International streaming segments given our focus on building consumer awareness of the streaming offerings. Marketing expenses incurred by our International streaming segment have been significant and will fluctuate dependent upon the number of International territories in which our streaming service is offered and the timing of the launch of new territories. Marketing costs are immaterial for the Domestic DVD segment.

•

We have demonstrated our ability to grow contribution margin as evidenced by the increase in contribution margin from 12% when we first began separately reporting Domestic streaming results in the fourth quarter of 2011 to 25% in the first quarter of 2014. As a result of our focus on growing the streaming segments, contribution margins for the Domestic and International streaming segments are lower than for our Domestic DVD segment. Investments in content and marketing associated with the International streaming segment will continue to fluctuate dependent upon the number of International territories in which our streaming service is offered and the timing of the launch of new territories.


•	As we grow our streaming segments, we continue to shift spending away from the Domestic DVD segment to invest more in streaming content and marketing for our streaming services.

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Domestic Streaming Segment

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	As of/ Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
Members:
Net additions	2,254			2,028			11	%
Members at end of period	35,674			29,174			22	%
Paid members at end of period	34,377			27,913			23	%

Contribution profit:
Revenues	$	798,617		$	638,649		25	%
Cost of revenues	517,094			440,334			17	%
Marketing	80,258			66,965			20	%
Contribution profit	201,265			131,350			53	%
Contribution margin	25		%	21		%

In the Domestic streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content offered through a membership plan. Our Domestic streaming membership plans are priced primarily at $7.99 per month. In the second quarter of 2013, we introduced membership plans priced at $11.99 per month under which members can stream content on up to four devices concurrently. New member additions and revenue related to $11.99 membership plans were not material for the three months ended March 31, 2014. The $160.0 million increase in our domestic streaming revenues was due to the 24% growth in the average number of paid memberships.

The $76.8 million increase in domestic streaming cost of revenues was primarily due to the $50.3 million increase in content licensing expenses relating to our existing and new streaming content including more exclusive and original programming. In addition, content delivery expenses increased by $15.1 million and other costs, such as payment processing fees and customer service call centers, increased $11.4 million due to our growing member base.

Marketing expenses increased $13.3 million primarily due to an increase in advertising partially offset by a decrease in payments to affiliates.

Our Domestic streaming segment had a contribution margin of 25% for the three months ended March 31, 2014, which increased as compared to the contribution margin of 21% for the three months ended March 31, 2013, as a result of growing memberships and revenue faster than content and marketing spending.

International Streaming Segment

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	As of /Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
Members:
Net additions	1,753			1,021			72	%
Members at end of period	12,683			7,142			78	%
Paid members at end of period	11,755			6,331			86	%

Contribution profit (loss):
Revenues	$	267,118		$	142,019		88	%
Cost of revenues	245,267			166,892			47	%
Marketing	56,840			52,047			9	%
Contribution loss	(34,989		)	(76,920		)	(55	)%

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In the International streaming segment, we derive revenues from monthly membership fees for services consisting solely of streaming content offered through a membership plan. Our International streaming membership plans are priced primarily at the equivalent of USD $7 to $14 per month. We launched our streaming service in Canada in September 2010 and have continuously expanded our services internationally with launches in Latin America in September 2011, the U.K. and Ireland in January 2012, Finland, Denmark, Sweden and Norway in October 2012 and the Netherlands in September 2013. We plan to continue to expand our services internationally and expect a substantial European expansion in the second half of 2014.

The $125.1 million increase in our international revenues was primarily due to the 91% growth in the average number of paid international memberships. Average paid international streaming memberships account for 25% of total average paid streaming memberships as of March 31, 2014, as compared to 17% of total average paid streaming memberships as of March 31, 2013.

The $78.4 million increase in international cost of revenues was primarily due to a $67.7 million increase in content licensing expenses relating to our existing and new streaming content, including more exclusive and original programming. Other costs increased $10.7 million primarily due to increases in our content delivery expenses, costs associated with our customer service call centers and payment processing fees, all driven by our growing member base.

International marketing expenses for the three months ended March 31, 2014 increased $4.8 million as compared to the three months ended March 31, 2013 mainly due to expenses incurred in the Netherlands, which launched in the third quarter of 2013.

International contribution losses improved $41.9 million for March 31, 2014 as compared to March 31, 2013, as a result of growing memberships and revenues faster than content and marketing spending. Our International streaming segment does not benefit from the established member base that exists for the Domestic segments. As a result of having to build a member base from zero, investments in streaming content and marketing programs for our International segment are larger initially relative to revenues, in particular as new territories are launched. The contribution losses for our International segment have been significant due to investments in streaming content and marketing programs to drive membership growth and viewing in our international markets.

Domestic DVD Segment

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	As of/ Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
Members:
Net losses	(278		)	(241		)	15	%
Members at end of period	6,652			7,983			(17	)%
Paid members at end of period	6,509			7,827			(17	)%

Contribution profit:
Revenues	$	204,354		$	243,293		(16	)%
Cost of revenues	106,825			129,726			(18	)%
Marketing	—			74			(100	)%
Contribution profit	97,529			113,493			(14	)%
Contribution margin	48		%	47		%

In the Domestic DVD segment, we derive revenues from our DVD-by-mail membership services. The price per plan for DVD-by-mail varies from $4.99 to $43.99 per month according to the plan chosen by the member. DVD-by-mail plans differ by the number of DVDs that a member may have out at any given point. Members electing access to high definition Blu-ray discs in addition to standard definition DVDs pay a surcharge ranging from $2 to $4 per month for our most popular plans.

The $38.9 million decrease in our domestic DVD revenues was due to a 16% decrease in the average number of paid memberships.

The $22.9 million decrease in domestic DVD cost of revenues was primarily due to a $4.8 million decrease in content acquisition expenses and a $12.5 million decrease in content delivery expenses resulting from a 22% decrease in the number of DVDs mailed to members. The decrease in shipments was driven by a decline in the number of DVD memberships coupled with a decrease in usage by these members. Other costs, primarily those associated with content processing and customer service center expenses, decreased $5.6 million primarily due to a decrease in hub operation expenses resulting from the decline in DVD shipments.

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Our Domestic DVD segment had a contribution margin of 48% for the three months ended March 31, 2014, and was relatively flat as compared to the three months ended March 31, 2013.

Consolidated Operating Expenses

Technology and Development

Technology and development expenses consist of payroll and related costs incurred in making improvements to our service offerings, including testing, maintaining and modifying our user interface, our recommendation, merchandising and content delivery technology, as well as our telecommunications systems and infrastructures. Technology and development expenses also include costs associated with computer hardware and software.

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
Technology and development	$	110,310		$	91,975		20	%
As a percentage of revenues	9		%	9		%

The $18.3 million increase in technology and development expenses was primarily due to a $19.4 million increase in personnel-related costs including stock-based compensation expense resulting from an 8% growth in average headcount supporting continued improvements in our streaming service and our international expansion, coupled with an increase in employee compensation and an increase in participation in our stock option plan.

General and Administrative

General and administrative expenses consist of payroll and related expenses for corporate personnel, as well as professional fees and other general corporate expenses. General and administrative expenses also include the gain on disposal of DVDs.

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
General and administrative	$	55,900		$	44,126		27	%
As a percentage of revenues	4		%	4		%

General and administrative expenses increased $11.8 million primarily due to a $13.7 million increase in personnel related costs including stock-based compensation expense resulting from a 33% increase in average headcount to support our growth, coupled with an increase in employee compensation and an increase in participation in our stock option plan. This increase was offset by a decrease in costs associated with miscellaneous expenses related to the use of outside and professional services, taxes and insurance for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

Interest Expense

Interest expense consists primarily of the interest associated with outstanding long-term debt obligations, including the amortization of debt issuance costs, as well as interest on our lease financing obligations.

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013

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	Three Months Ended						Change
	March 31, 2014			March 31, 2013			Q1'14 vs. Q1'13
	(in thousands, except percentages)
Interest expense	$	(10,052	)	$	(6,740	)	49	%
As a percentage of revenues	1		%	1		%

Interest expense for the three months ended March 31, 2014 consisted primarily of $9.3 million of interest accrued on our notes. The increase in interest expense for the three months ended March 31, 2014 as compared the three months ended March 31, 2013 was due to the higher aggregate principal of interest bearing notes outstanding.

Interest and Other Income (Expense)

Interest and other income (expense) consists primarily of interest earned on cash, cash equivalents and short-term investments and foreign exchange gains and losses on foreign currency denominated balances.

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	Three Months Ended				Change
	March 31, 2014		March 31, 2013		Q1'14 vs. Q1'13
	(in thousands, except percentages)
Interest and other income (expense)	$	1,401	$	977	43	%
As a percentage of revenues	NM		NM

Interest and other income (expense) increased for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to an increase in interest income and a decrease in foreign exchange losses on foreign currency denominated balances.

Extinguishment of Debt

In connection with the redemption of the outstanding $200.0 million aggregate principal amount of the 8.50% Notes, we recognized a loss on extinguishment of debt of $25.1 million in the three months ended March 31, 2013, which consisted of expenses associated with the redemption, including a $19.4 million premium payment pursuant to the make-whole provision in the indenture governing the 8.50% Notes.

Provision (Benefit) for Income Taxes

The effective tax rates (benefit) for the three months ended March 31, 2014 and 2013 were 40% and (189)%, respectively. The effective tax rate for the three months ended March 31, 2014 differed from the federal statutory rate primarily due to state taxes, foreign taxes and nondeductible expenses. The effective tax (benefit) for the three months ended March 31, 2013 differed from the federal statutory rate primarily due to a discrete benefit recorded for Federal R&D credit. On January 2, 2013, the American Taxpayer Relief Act of 2012 (H.R. 8) was signed into law which retroactively extended the Federal R&D credit from January 1, 2012 through December 31, 2013. As a result, the Company recognized the retroactive benefit of the 2012 Federal R&D credit of approximately $3.1 million as a discrete item in the first quarter of 2013, the period in which the legislation was enacted.

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments were $1,668.2 million and $1,200.4 million at March 31, 2014 and December 31, 2013, respectively. In February 2014, we issued $400.0 million aggregate principal amount of 5.750% Senior Notes due 2024 (the "5.750% Notes"). In February 2013, we issued $500.0 million aggregate principal amount of 5.375% Senior Notes due 2021 (the "5.375% Notes"). We used approximately $224.5 million of the net proceeds to redeem our outstanding 8.50% Notes, including a $19.4 million make-whole premium and $5.1 million of accrued and unpaid interest.

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Our primary uses of cash include licensing of content, content delivery, marketing programs and payroll. We expect to continue to make significant investments to license streaming content both domestically and internationally and in 2014 expect to substantially increase our investment in original content. Original content and content that is licensed in an earlier window through an output arrangement will typically, depending upon the terms, require more up-front cash payments relative to the expense and, therefore, future investments could impact our liquidity and result in a use of operating cash. We also expect to significantly increase our investments in international expansion, including substantial expansion in Europe in the second half of 2014.

Our ability to obtain any additional financing that we may choose to, or need to, obtain to finance our international expansion, our investment in original content or otherwise, will depend on, among other things, our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. If we raise additional funds through the issuance of equity or debt securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution.

As of March 31, 2014 , $80.6 million of cash and cash equivalents were held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. income taxes and foreign withholding taxes on the amount associated with undistributed earnings for certain foreign subsidiaries.

Free Cash Flow

We define free cash flow as cash provided by operating and investing activities excluding the non-operational cash flows from purchases, maturities and sales of short-term investments. We believe free cash flow is an important liquidity metric because it measures, during a given period, the amount of cash generated that is available to repay debt obligations, make investments and for certain other activities. Free cash flow is considered a non-GAAP financial measure and should not be considered in isolation of, or as a substitute for, net income, operating income, cash flow provided by operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP.

In assessing liquidity in relation to our results of operations, we compare free cash flow to net income, noting that the three major recurring differences are excess content payments over expenses, non-cash stock-based compensation expense and other working capital differences which include deferred revenue, taxes and semi-annual interest payments on our outstanding debt. Our receivables from members settle quickly and deferred revenue is a source of cash flow. For streaming content, we typically enter into multi-year licenses with various content providers that may result in an increase in content library and a corresponding increase in liabilities on the Consolidated Balance Sheets. The payment terms for these license fees may extend over the term of the license agreements, which typically range from six months to five years.

Three months ended March 31, 2014 as compared to the three months ended March 31, 2013



	Three Months Ended
	March 31, 2014			March 31, 2013
	(in thousands)
Net cash provided by (used in) operating activities	$	36,359		$	(12,250	)
Net cash provided by (used in) investing activities	57,639			(179,236		)
Net cash provided by financing activities	458,186			321,582

Non-GAAP free cash flow reconciliation:
Net cash provided by (used in) operating activities	36,359			(12,250		)
Acquisition of DVD content library	(14,914		)	(21,193		)
Purchases of property and equipment	(13,334		)	(12,118		)
Other assets	295			4,050
Non-GAAP free cash flow	$	8,406		$	(41,511	)

Cash provided by operating activities increased $48.6 million, primarily due to an increase in subscription revenues of $246.1 million or 24%. This increase was partially offset by increased payments for content acquisition and licensing other than DVD library of $132.8 million or 21% as well as increased payments associated with higher operating expenses.

Cash provided by investing activities increased $236.9 million, primarily due to a decrease of $235.6 million in purchases of short-term investments, net of proceeds from sales and maturities.

Cash provided by financing activities increased $136.6 million primarily due to the $393.3 million net proceeds from the issuance of the 5.750% Notes in the three months ended March 31, 2014 compared to the $490.6 million net proceeds from the issuance of the 5.375% Notes

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less the $219.4 million redemption of our 8.50% Notes in the three months ended March 31, 2013. Cash provided by financing activities for the three months ended March 31, 2014 primarily consisted of cash flows from the issuance of the 5.750% Senior Notes.

Free cash flow was $44.7 million lower than net income for the three months ended March 31, 2014 primarily due to $110.6 million of content cash payments over expense, partially offset by $25.8 million of non-cash stock-based compensation expense and $40.1 million favorable working capital differences.

Free cash flow was $44.2 million lower than net income for the three months ended March 31, 2013 primarily due to $97.2 million of content cash payments over expense partially offset by $17.7 million non-cash stock-based compensation expense, $10.2 million favorable other working capital differences and $25.1 million loss on debt extinguishment (a financing activity).

Contractual Obligations

For the purpose of this table, contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The expected timing of payment of the obligations discussed below is estimated based on information available to us as of March 31, 2014 . Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations. The following table summarizes our contractual obligations at March 31, 2014 :



	Payments due by Period
Contractual obligations (in thousands):	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Streaming content obligations (1)	$	7,123,209	$	3,055,127	$	3,393,761	$	630,518	$	43,803
Debt (2)	1,316,524		50,514		99,750		99,750		1,066,510
Lease obligations (3)	198,946		26,220		54,526		35,115		83,085
Other purchase obligations (4)	311,843		146,304		150,914		14,625		—
Total	$	8,950,522	$	3,278,165	$	3,698,951	$	780,008	$	1,193,398

(1)

Streaming content obligations are related to streaming content licenses. As of March 31, 2014 , such obligations were comprised of $1.8 billion included in "Current content liabilities" and $1.3 billion of "Non-current content liabilities" on the Consolidated Balance Sheets and $4.0 billion of obligations that are not reflected on the Consolidated Balance Sheets as they do not yet meet the criteria for asset recognition.

A streaming content obligation is incurred at the time we sign a license agreement to obtain future titles. Once a title becomes available, a content liability is generally recorded on the Consolidated Balance Sheets. Certain agreements include the obligation to license rights for unknown future titles, the ultimate quantity and / or fees for which are not yet determinable as of the reporting date. Because the amount is not reasonably estimable, we do not include any estimated obligation for these future titles beyond the known minimum amount. However, the unknown obligations are expected to be significant and the expected timing of payments could range primarily from one year to more than five years.


(2)	Long-term debt obligations include our 5.375% Notes and 5.750% Notes consisting of principal and interest payments.

(3)

Lease obligations include lease financing obligations of $11.3 million related to our current Los Gatos, California headquarters for which we are the deemed owner for accounting purposes and commitments of $187.6 million for facilities under non-cancelable operating leases with various expiration dates through approximately 2025, including commitments of $121.2 million for facilities lease agreements which will commence after the leased buildings have been constructed.


(4)	Other purchase obligations include all other non-cancelable contractual obligations. These contracts are primarily related to streaming content delivery, DVD content acquisition, and miscellaneous open purchase orders for which we have not received the related services or goods.

As of March 31, 2014 , we had gross unrecognized tax benefits of $73.4 million and an additional $4.1 million for gross interest and penalties classified as “Other non-current liabilities” on the Consolidated Balance Sheets. At this time, we are not able to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes; therefore, such amounts are not included in the above contractual obligation table.

Off-Balance Sheet Arrangements

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As part of our ongoing business, we do not engage into any transactions with unconsolidated entities, such as entities often referred to as structured finance or special purpose entities, whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.

Indemnification

The information set forth under Note 10 in the notes to the consolidated financial statements under the caption “Indemnification” is incorporated herein by reference.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and results of operations, and which require a company to make its most difficult and subjective judgments. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Streaming Content

We license rights to stream TV shows, movies, and original content to members for unlimited viewing. These licenses are for a fixed fee and specify license windows that generally range from six months to five years. Payment terms may extend over the license window, or may require more up-front payments as is typically the case for original content and content that is licensed in an earlier window through an output arrangement.

We capitalize the fee per title and record a corresponding liability at the gross amount of liabilities when the license period begins, the cost of the title is known and the title is accepted and available for streaming. The portion available for streaming within one year is recognized as “Current content library” and the remaining portion as “Non-current content library” on the Consolidated Balance sheets. The acquisition of streaming content licenses rights and the changes in related liabilities, are classified within cash used in operating activities on the Consolidated Statements of Cash Flows.

We amortize the content library in “Cost of revenues” on a straight line or on an accelerated basis, as appropriate:


•	For content that does not premiere on the Netflix service (representing the vast majority of content), we amortize on a straight-line basis over the shorter of each title's contractual window of availability or estimated period of use, beginning with the month of first availability. The amortization period typically ranges from six months to five years.

•

For content that premieres on the Netflix service, we expect more upfront viewing due to the additional merchandising and marketing efforts for this original content available only on Netflix. Hence, we amortize on an accelerated basis over the amortization period, which is the shorter of four years or the license period, beginning with the month of first availability. If a subsequent season is added, the amortization period is extended by a year.


•	If the cost per title cannot be reasonably estimated, the license fee is not capitalized and costs are expensed on a straight line basis over the license period. This typically occurs when the license agreement does not specify the number of titles, the license fee per title or the windows of availability per title.

The content library is stated at the lower of unamortized cost or net realizable value. Streaming content licenses (whether capitalized or not) are reviewed in aggregate at the geographic region level for impairment when an event or change in circumstances indicates a change in the expected usefulness of the content. The level of geographic aggregation is determined based on the streaming content rights which are generally specific to a geographic region inclusive of several countries (such as Latin America). No material write down from unamortized cost to a lower net realizable value was recorded in any of the periods presented.

We have entered into certain licenses with performing rights organizations ("PROs"), and are currently involved in negotiations with other PROs, that hold certain rights to music and other entertainment works "publicly performed" in connection with streaming content into various territories. Accruals for estimated license fees are recorded and then adjusted based on any changes in estimates. These amounts are included in the streaming content obligations. The results of these negotiations are uncertain and may be materially different from management's estimates.

Income Taxes

We record a provision for income taxes for the anticipated tax consequences of our 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

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the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as net 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.

Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

In evaluating our ability to recover our deferred tax assets, in full or in part, we consider all available positive and negative evidence, including our past operating results, and our forecast of future earnings, future taxable income and prudent and feasible tax planning strategies. The assumptions utilized in determining future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Actual operating results in future years could differ from our current assumptions, judgments and estimates. However, we believe that it is more likely than not that substantially all deferred tax assets recorded on our Consolidated Balance Sheets will ultimately be realized. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination.

We did not recognize certain tax benefits from uncertain tax positions within the provision for income taxes. We may recognize a tax benefit 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. At March 31, 2014 , our estimated gross unrecognized tax benefits were $73.4 million of which $61.1 million , if recognized, would favorably impact our future earnings. Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates. See Note 9 to the consolidated financial statements for further information regarding income taxes.

Stock-Based Compensation

Stock-based compensation expense at the grant date is based on the total number of options granted and an estimate of the fair value of the awards.

We calculate the fair value of new stock-based compensation awards under our stock option plans using a lattice-binomial model. This model requires the input of highly subjective assumptions, including price volatility of the underlying stock. Changes in the subjective input assumptions can materially affect the estimate of fair value of options granted and our results of operations could be impacted.

•

Expected Volatility: Our computation of expected volatility is based on a blend of historical volatility of our common stock and implied volatility of tradable forward call options to purchase shares of our common stock. Our decision to incorporate implied volatility was based on our assessment that implied volatility of publicly traded options in our common stock is more reflective of market conditions and, therefore, can reasonably be expected to be a better indicator of expected volatility than historical volatility of our common stock. We include the historical volatility in our computation due to low trade volume of our tradable forward call options in certain periods thereby precluding sole reliance on implied volatility. An increase of 10% in our computation of expected volatility would increase the total stock-based compensation expense by approximately $2.0 million for the three months ended March 31, 2014 .

•

Suboptimal Exercise Factor: Our computation of the suboptimal exercise factor is based on historical option exercise behavior and the terms and vesting periods of the options granted and is determined for both executives and non-executives. An increase in the suboptimal exercise factor of 10% would increase the total stock-based compensation expense by approximately $0.6 million for the three months ended March 31, 2014 .

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Item 3.	Quantitative and Qualitative Disclosures About Market Risk

For financial market risks related to changes in interest rates and foreign currency, reference is made to Item 7A “Quantitative and Qualitative Disclosures About Market Risk” contained in Part II of our Annual Report on Form 10-K for the year ended December 31, 2013 . Our exposure to market risk has not changed significantly since December 31, 2013 .


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective in providing reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

The information set forth under Note 10 in the notes to the consolidated financial statements under the caption “Legal Proceedings” is incorporated herein by reference.


Item 1A.	Risk Factors

There have been no material changes from the risk factors as previously disclosed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 .


Item 6.	Exhibits

(a) Exhibits:

ExhibitNumber

Exhibit Description

Incorporated by Reference

Filed
Herewith

Form

File No.

Exhibit

Filing Date

3.1

Amended and Restated Certificate of Incorporation

10-Q

000-49802

3.1

August 2, 2004

3.2

Amended and Restated Bylaws

8-K

000-49802

3.1

March 20, 2009

3.3

Certificate of Amendment to the Amended and Restated Certificate of Incorporation

10-Q

000-49802

3.3

August 2, 2004

3.5

Certificate of Elimination of Rights, Preferences and Privileges of Series A Participating Preferred Stock

8-K

001-35727

3.1

December 30, 2013

4.1

Form of Common Stock Certificate

S-1/A

333-83878

4.1

April 16, 2002

4.2

Indenture, dated as of February 1, 2013, by and between the Company and Wells Fargo Bank, National Association, as Trustee.

8-K

001-35727

4.1

February 1, 2013

4.3

Indenture, dated as of February 19, 2014, by and between the Company and Wells Fargo Bank, National Association, as Trustee.

8-K

001-35727

4.1

February 19, 2014

10.1†

Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors

S-1/A

333-83878

10.1

March 20, 2002

10.2†

2002 Employee Stock Purchase Plan

Def 14A

000-49802

April 8, 2010

10.3†

Amended and Restated 2002 Stock Plan

Def 14A

000-49802

March 31, 2006

10.4†

2011 Stock Plan

Def 14A

000-49802

April 20, 2011

10.5†

Description of Director Equity Compensation Plan

8-K

000-49802

99.1

June 16, 2010

10.6†

Description of Director Equity Compensation Plan

8-K

000-49802

10.1

December 28, 2009

10.7†

Amended and Restated Executive Severance and Retention Incentive Plan

10-K

001-35727

10.7

January 31, 2013

10.8

Registration Rights Agreement, dated as of February 19, 2014, by and among the Company and Morgan Stanley & Co. LLC, as representative of the Initial Purchasers listed in Schedule 1 thereto

8-K

001-35727

10.1

February 19, 2014

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

The following financial information from Netflix, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on April 23, 2014, formatted in XBRL includes: (i) Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013, (ii) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013 (iii) Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013, (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 and (v) the Notes to the Consolidated Financial Statements.


*	These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.


†	Indicates a management contract or compensatory plan.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	NETFLIX, INC.
Dated: April 23, 2014	By:	/s/ R EED H ASTINGS
		Reed Hastings Chief Executive Officer (Principal executive officer)

Dated: April 23, 2014	By:	/s/ D AVID W ELLS
		David Wells Chief Financial Officer (Principal financial and accounting officer)

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EXHIBIT INDEX

ExhibitNumber

Exhibit Description

Incorporated by Reference

Filed
Herewith

Form

File No.

Exhibit

Filing Date

3.1

Amended and Restated Certificate of Incorporation

10-Q

000-49802

3.1

August 2, 2004

3.2

Amended and Restated Bylaws

8-K

000-49802

3.1

March 20, 2009

3.3

Certificate of Amendment to the Amended and Restated Certificate of Incorporation

10-Q

000-49802

3.3

August 2, 2004

3.5

Certificate of Elimination of Rights, Preferences and Privileges of Series A Participating Preferred Stock

8-K

001-35727

3.1

December 30, 2013

4.1

Form of Common Stock Certificate

S-1/A

333-83878

4.1

April 16, 2002

4.2

Indenture, dated as of February 1, 2013, by and between the Company and Wells Fargo Bank, National Association, as Trustee.

8-K

001-35727

4.1

February 1, 2013

4.3

Indenture, dated as of February 19, 2014, by and between the Company and Wells Fargo Bank, National Association, as Trustee.

8-K

001-35727

4.1

February 19, 2014

10.1†

Form of Indemnification Agreement entered into by the registrant with each of its executive officers and directors

S-1/A

333-83878

10.1

March 20, 2002

10.2†

2002 Employee Stock Purchase Plan

Def 14A

000-49802

April 8, 2010

10.3†

Amended and Restated 2002 Stock Plan

Def 14A

000-49802

March 31, 2006

10.4†

2011 Stock Plan

Def 14A

000-49802

April 20, 2011

10.5†

Description of Director Equity Compensation Plan

8-K

000-49802

99.1

June 16, 2010

10.6†

Description of Director Equity Compensation Plan

8-K

000-49802

10.1

December 28, 2009

10.7†

Amended and Restated Executive Severance and Retention Incentive Plan

10-K

001-35727

10.7

February 1, 2013

10.8

Registration Rights Agreement, dated as of February 19, 2014, by and among the Company and Morgan Stanley & Co. LLC, as representative of the Initial Purchasers listed in Schedule 1 thereto

8-K

001-35727

10.1

February 19, 2014

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101


*	These certifications are not deemed filed by the SEC and are not to be incorporated by reference in any filing we make under the Securities Act of 1933 or the Securities Exchange Act of 1934, irrespective of any general incorporation language in any filings.


†	Indicates a management contract or compensatory plan.

TABLE OF CONTENTS

Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II. Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 6. Exhibitsprint

FUND	NUMBER OF SHARES	VALUE ($)	PUT OR CALL
VANGUARD GROUP INC	37,488,005	33,413,808,616
FMR LLC	20,887,090	18,617,081,236
Capital World Investors	11,779,624	10,499,544,508
PRICE T ROWE ASSOCIATES INC /MD/	11,427,667	10,185,708
GEODE CAPITAL MANAGEMENT, LLC	9,323,952	8,287,822,823
SUSQUEHANNA INTERNATIONAL GROUP, LLP	8,869,449	7,905,517,283
JENNISON ASSOCIATES LLC	6,530,346	6,089,743,649
CITADEL ADVISORS LLC	6,447,604	5,746,878,397	Call
NORGES BANK	5,631,072	5,019,087,095
Capital Research Global Investors	4,970,855	4,430,655,599
Capital International Investors	4,793,058	4,272,227,512
WELLINGTON MANAGEMENT GROUP LLP	4,236,991	3,776,514,819
BAILLIE GIFFORD & CO	4,034,633	3,762,416,311
JANE STREET GROUP, LLC	3,252,554	2,899,066,430
IMC-Chicago, LLC	3,244,404	3,025,504,062	Call
EDGEWOOD MANAGEMENT LLC	2,808,713	2,503,462,071
UBS AM, a distinct business unit of UBS ASSET MANAGEMENT AMERICAS LLC	2,708,743	2,414,356,808
CHARLES SCHWAB INVESTMENT MANAGEMENT INC	2,668,392	2,378,391,158
Legal & General Group Plc	2,587,988	2,306,725,470
Nuveen Asset Management, LLC	2,310,423	2,059,326,140
ARROWSTREET CAPITAL, LIMITED PARTNERSHIP	2,301,098	2,051,016,452
SRS Investment Management, LLC	2,034,454	1,813,349,539
GQG Partners LLC	1,905,043	1,698,002,875
Clearbridge Investments, LLC	1,891,858	1,686,251,149
POLEN CAPITAL MANAGEMENT LLC	1,727,862	1,540,078,082
CTC LLC	1,722,500	1,535,298,700	Call
WOLVERINE TRADING, LLC	1,609,420	1,449,170,051
MILLENNIUM MANAGEMENT LLC	1,560,850	1,391,216,822	Call
AMUNDI	1,502,970	1,315,098,750
SCHRODER INVESTMENT MANAGEMENT GROUP	1,498,474	1,335,619,845
SIMPLEX TRADING, LLC	1,490,000	1,297,701	Call
SANDS CAPITAL MANAGEMENT, LLC	1,482,174	1,321,091,330
D. E. Shaw & Co., Inc.	1,467,916	1,308,382,889	Put
Parametric Portfolio Associates LLC	1,440,289	539,518
MASSACHUSETTS FINANCIAL SERVICES CO /MA/	1,387,159	1,293,567,382
AMERICAN CENTURY COMPANIES INC	1,303,677	1,161,994,320
DEUTSCHE BANK AG\	1,303,103	1,161,481,765
Artisan Partners Limited Partnership	1,292,617	1,152,135,384
HSBC HOLDINGS PLC	1,239,513	1,106,860,294
Swiss National Bank	1,212,400	1,080,636,368
BNP PARIBAS FINANCIAL MARKETS	1,151,989	1,750,099,689
Alphinity Investment Management Pty Ltd	1,066,518	950,608,823
Squarepoint Ops LLC	1,052,996	938,556,395
DZ BANK AG Deutsche Zentral Genossenschafts Bank, Frankfurt am Main	1,040,392	927,322,197
DIMENSIONAL FUND ADVISORS LP	987,923	880,648,726
AXIOM INVESTORS LLC /DE	894,909	797,650,290
CANADA PENSION PLAN INVESTMENT BOARD	881,697	785,874,170
CMT Capital Markets Trading GmbH	854,063	761,243
National Pension Service	849,838	757,477,606
NORDEA INVESTMENT MANAGEMENT AB	848,150	760,917,773
Jericho Capital Asset Management L.P.	819,000	729,991,080
PICTET ASSET MANAGEMENT SA	796,497	350,848,964
RAYMOND JAMES & ASSOCIATES	754,408	535,049,116
FIRST TRUST ADVISORS LP	751,319	669,665,267
California Public Employees Retirement System	736,545	656,497,289
Qube Research & Technologies Ltd	735,373	655,452,662
Mitsubishi UFJ Asset Management Co., Ltd.	714,606	629,603,616
36 SOUTH CAPITAL ADVISORS LLP	709,800	433,219	Put
COATUE MANAGEMENT LLC	695,526	619,936,235
LPL Financial LLC	680,561	633,870,963
CALIFORNIA STATE TEACHERS RETIREMENT SYSTEM	674,530	601,222,080
Newlands Management Operations LLC	670,722	597,827,933
PICTET ASSET MANAGEMENT LTD	667,244	352,445
Voya Investment Management LLC	657,354	585,659,026
PEAK6 LLC	656,702	585,331,978	Call
Robeco Institutional Asset Management B.V.	644,437	600,956,836
AMUNDI ASSET MANAGEMENT US, INC.	640,682	334,219
GARDNER RUSSO & QUINN LLC	632,773	564,003,230
ProShare Advisors LLC	624,537	582,399,487
PEAK6 Investments LLC	615,502	436,557,019	Call
ENVESTNET ASSET MANAGEMENT INC	601,454	560,874,211
NEW YORK STATE COMMON RETIREMENT FUND	577,537	538,571
TD Asset Management Inc	576,009	537,145,673
CREDIT SUISSE AG/	573,971	348,589,807
LOS ANGELES CAPITAL MANAGEMENT LLC	573,890	535,169,642
CANADA LIFE ASSURANCE Co	568,223	506,112
Pictet Asset Management Holding SA	566,509	528,288,603
Bank Julius Baer & Co. Ltd, Zurich	552,373	561,028,863
VICTORY CAPITAL MANAGEMENT INC	518,029	483,077,584
Parallax Volatility Advisers, L.P.	513,313	457,526,143	Call
EATON VANCE MANAGEMENT	511,135	120,341
Marshall Wace North America L.P.	510,827	311,780
Twin Tree Management, LP	510,732	455,225,651	Call
MARSHALL WACE, LLP	504,527	449,695,006
GILDER GAGNON HOWE & CO LLC	502,434	447,829,645
VIKING GLOBAL INVESTORS LP	502,298	447,708,253
MIRAE ASSET GLOBAL ETFS HOLDINGS Ltd.	499,355	445,774,479
Assenagon Asset Management S.A.	481,831	449,321,862
KBC Group NV	477,251	445,050
Swedbank AB	466,765	416,036,981
Claraphi Advisory Network, LLC	464,314	464,314
TWO SIGMA ADVISERS, LP	461,900	411,700,708
FRED ALGER MANAGEMENT, LLC	457,636	407,900,120
CAPITAL FUND MANAGEMENT S.A.	453,997	404,656,606
Russell Investments Group, Ltd.	451,229	402,518,288
Alecta Tjanstepension Omsesidigt	451,200	420,649,248
HARDING LOEVNER LP	447,190	398,589,650
Walleye Capital LLC	446,334	397,826,421	Call
PUTNAM INVESTMENTS LLC	426,612	207,708,851
Universal- Beteiligungs- und Servicegesellschaft mbH	414,228	386,280,042

DIRECTORS	AGE	BIO	OTHER DIRECTOR MEMBERSHIPS
Ted Sarandos	60	Mr. Sarandos has been responsible for all content operations since 2000, and led the Company’s transition into original content production that began in 2013 with the launch of series such as House of Cards , Arrested Development and Orange is the New Black . With more than 20 years’ experience in home entertainment, he is recognized in the industry as an innovator in film acquisition and distribution and was named one of Time Magazine’s 100 Most Influential People of 2013. He is a Henry Crown Fellow at the Aspen Institute, a trustee of the American Film Institute, and on the boards of the Academy Museum of Motion Pictures and Exploring the Arts. Mr. Sarandos was awarded a CBE, (Commander of the British Empire) from King Charles in 2024, for extraordinary service to the creative industries in the United Kingdom.
Susan Rice	60	Why this director is valuable to Netflix As a former U.S. diplomat and United Nations Ambassador, National Security Advisor and Domestic Policy Advisor to the President, Ambassador Rice brings her unique experience and expertise in international affairs, global security, governmental and public policy matters to the Board. Also... Ambassador Rice was the 2024 Bernard and Susan Liautaud Visiting Fellow at Stanford University, Distinguished Visiting Research Fellow at American University’s School of International Service, Non-Resident Senior Fellow at the Belfer Center for Science and International Affairs at Harvard’s Kennedy School of Government, Visiting Fellow at Harvard University’s Institute of Politics, Senior Fellow at the Brookings Institution, and Contributing Opinion Writer for the New York Times. She has served on numerous boards, including the John F. Kennedy Center for the Performing Arts, Bureau of National Affairs, National Democratic Institute, and the US Fund for UNICEF. She was also a board member of Netflix from 2018 to 2021. Ambassador Rice earned her master’s degree and doctorate in international relations from Oxford University, where she was a Rhodes Scholar, and her Bachelor’s degree with honors from Stanford University. Career Snapshot: • U.S. Domestic Policy Advisor (2021-2023) • U.S. National Security Advisor (2013-2017) • U.S. Permanent Representative to the United Nations (2009-2013) • Assistant Secretary of State for African Affairs (1997-2001) • Special Assistant to the President, National Security Council, The White House (1995-1997)
Richard Barton	57	Why this director is valuable to Netflix Having founded successful internet-based companies (including Zillow, Expedia and GlassDoor), Mr. Barton provides strategic and technical insight to the Board, and as the Co-Executive Chairman and former Chief Executive Officer of Zillow Group, brings extensive leadership and operational experience, as well as financial acumen to the Board. In addition, Mr. Barton brings experience with respect to marketing products to consumers through the internet. Also... Mr. Barton was a venture partner at Benchmark, a venture capital firm that has been an early-stage investor in companies like Twitter, Instagram, Uber and Zillow, from 2005 to 2018. He has served on many public company boards, including Altimeter Growth Corp. from 2020 to 2021 and Altimeter Growth Corp. 2 from 2021 to 2022. Mr. Barton holds a B.S. in general engineering: industrial economics from Stanford University. Career Snapshot: • Co-Executive Chairman of Zillow Group (since 2024), Co-founder and Chief Executive of Zillow Group (2005-2011 and 2019-2024) • Co-founder and Chairman of GlassDoor (2007-2018) • Founder and Chief Executive Officer of Expedia (1996-2003)
Reed Hastings	64	Reed Hastings, the co-founder and former co-CEO and President of the Company, serves as the Chairman of the Board. The Board believes that Mr. Hastings is best situated to serve as the Chairman given his role as the founder and former CEO. The co-CEOs also serve on the Board. The Board has appointed Jay Hoag as its lead independent director. As lead independent director, Mr. Hoag’s responsibilities include:
Mathias D pfner	62	Mr. Döpfner has extensive experience in media and digital transformation and a strong track record of increasing revenues related to digital activities. He previously served on the boards of Vodafone Group plc from 2015 to 2018 and Time Warner Inc. from 2006 to 2018. Additionally, his relationships and honorary offices at entities including the American Jewish Committee and the steering committee of the Bilderberg conference among many others provide him with relevant insight and perspective in international media. He studied Musicology, German and Theatrical Arts in Frankfurt and Boston.	Warner Music Group Corp.
Leslie Kilgore	59	Ms. Kilgore’s experience as a marketing executive with internet retailers and consumer product companies provides a unique business perspective and her numerous managerial positions provide strategic and operational experience to the Board.	PINTEREST, INC.
Jay Hoag	66	Why this director is valuable to Netflix As a venture capital investor, Mr. Hoag brings strategic insights and financial experience to the Board. He has evaluated, invested in and served as a board member for numerous companies, both public and private, and is familiar with a full range of corporate and board functions. His many years of experience in helping companies shape and implement strategy provide the Board with unique perspectives on matters such as risk management, corporate governance, talent selection and management. Also... Mr. Hoag has been a technology investor and venture capitalist for more than 40 years, involved in numerous technology investments, including Actuate Software (acquired by OpenText), Airbnb, Ariba (acquired by SAP), Altiris (acquired by Symantec), BlueCoat Systems (formerly CacheFlow), C\|NET, eHarmony, Electronic Arts, Encompass (acquired by Yahoo!), EXE Technologies (acquired by SSA Global), Expedia, Facebook, Fandango (acquired by Comcast), Groupon, LinkedIn, ONYX Software, Peloton, Prodege (parent company of Swagbucks & acquired by a private equity firm), RealNetworks, Sportradar, Spotify, SpringStreet (acquired by Homestore.com), Strava, TechTarget, TripAdvisor, Vacationspot.com (acquired by Expedia), Viant (acquired by iXL), and Zillow. Mr. Hoag is chair of TCV’s Investment Committee, a member of TCV’s Executive Committee, and is on the Investment Advisory Committee at the University of Michigan, the Board of Trustees of Northwestern University, and is a Trustee Emeritus at Vanderbilt University. Previously, Mr. Hoag served on the board of directors of a number of other public and private companies, including TechTarget, Inc. from 2004 to 2016, Electronic Arts from 2011 to 2021, Prodege from 2014 to 2021, and TCV Acquisition Corp. from 2021 to 2023. Mr. Hoag holds an M.B.A. from the University of Michigan and a B.A. from Northwestern University. Career Snapshot: • Founding General Partner of TCV (Technology Crossover Ventures), a venture capital firm (since 1995)
Greg Peters	54	Mr. Peters, our co-Chief Executive Officer, has served in roles of increasing responsibility at Netflix since 2008, including Chief Operating Officer and Chief Product Officer. Mr. Peters brings to the Board a deep understanding of the Company’s business, including its technology and worldwide operations, as well as business acumen and executive leadership experience.
Brad Smith	66	Why this director is valuable to Netflix With a leading role at Microsoft, Mr. Smith brings broad business and international experience on a variety of issues, including government affairs and public policy to the Board. Mr. Smith also brings experience playing a key role in representing Microsoft externally and in leading Microsoft’s work on a number of critical issues, involving the intersection of technology and society, including artificial intelligence, cybersecurity, privacy, accessibility, environmental sustainability and digital safety, among others, which provides additional expertise to the Board. Also... Mr. Smith has led a push for diversity within Microsoft’s legal division, advocating for increasing employment of diverse employees at the company and associated law firms. Mr. Smith holds a B.A. in international relations and economics from Princeton, a J.D. from Columbia University School of Law and also studied international law and economics at the Graduate Institute of International Studies in Geneva. Career Snapshot: • Vice Chair and President of Microsoft (since 2021); he originally joined Microsoft in 1993 • Associate and then Partner, Covington & Burling (1986-1993)
Anne Sweeney	67	Ms. Sweeney has held various senior positions with large entertainment companies, which provided her with broad strategic and operational experience. Her experience in the entertainment industry provides a unique business perspective to the Board as Netflix builds its global internet TV network.
Ann Mather	65	Ms. Mather’s experience as an executive with several major media companies provides a unique business perspective. As a former CFO and senior finance executive at major corporations, she brings more than 20 years of financial and accounting expertise to the Board. Additionally, Ms. Mather’s numerous managerial positions and service on public company boards provides strategic, operational and corporate governance experience.

Name and Principal Position	Year		Salary ($)		Stock Awards ($)		Option Awards ($)		Non-Equity Incentive Plan Compensation ($)		All Other Compensation ($)		Total ($)
TED SARANDOS co-Chief Executive Officer and President		2024		3,000,000		42,707,872		2,253,067		12,000,000		1,961,458		61,922,397
		2023		3,000,000		—		28,308,620		16,541,385		1,984,931		49,834,936
		2022		20,000,000		—		28,512,519		—		1,786,777		50,299,296
GREG PETERS co-Chief Executive Officer and President		2024		3,000,000		42,707,872		1,951,611		12,000,000		613,091		60,272,574
		2023		2,890,385		—		22,667,588		13,938,549		620,602		40,117,124
		2022		16,000,000		—		11,512,000		—		617,263		28,129,263
REED HASTINGS * Executive Chairman		2024		100,000		965,039		281,697		400,000		2,215		1,748,951
		2023		510,962		—		10,643,357		—		136,092		11,290,411
		2022		650,000		—		49,408,182		—		1,015,055		51,073,237
SPENCER NEUMANN Chief Financial Officer		2024		1,500,000		14,465,668		788,598		6,000,000		147,331		22,901,597
		2023		7,000,000		—		9,907,780		—		94,073		17,001,853
		2022		7,000,000		—		10,022,952		—		38,537		17,061,489
DAVID HYMAN Chief Legal Officer		2024		1,500,000		8,955,597		788,598		6,000,000		15,647		17,259,842
		2023		4,000,000		—		9,664,029		—		16,044		13,680,073
		2022		6,000,000		—		7,237,681		—		12,971		13,250,652

Customer name	Ticker
Amazon.com, Inc.	AMZN
Micron Technology, Inc.	MU
Microsoft Corporation	MSFT
Oracle Corporation	ORCL

Owner	Position	Direct Shares	Indirect Shares
KILGORE LESLIE J	-	35,396	0
HYMAN DAVID A	-	31,610	0
HYMAN DAVID A	-	31,610	0
SARANDOS THEODORE A	-	15,168	0
Peters Gregory K	-	12,950	0
SMITH BRADFORD L	-	7,969	0
Dopfner Mathias	-	5,027	0
Neumann Spencer Adam	-	3,691	0
BARTON RICHARD N	-	246	80
HASTINGS REED	-	114	2,154,240
Hoag Jay C	-	0	87,234
HASTINGS REED	-	0	4,991,540

NFLX 10-Q Quarter ended March 31, 2014