Income Statement and Balance Sheet

¶ … income statement and balance sheet for Netflix's 2007 fiscal year using its annual report. Results are compared with the company's 2006 fiscal year to gauge short-term financial performance as well as implications for long-term performance. While Netflix has had an impressive year in FY 2007, there are signs that FY 2008 may be more challenging, but the company appears to be taking the right moves to position itself for the future.

Sales reported for FY 2007 income statement show an impressive increase over FY2 007, growing from $996.7 million in FY 2006 to $1,205.3 million in FY 2007. This represents a 20.9% increase. Net profit showed an even more impressive jump, increasing from $49.1 million in FY 2006 to $67 million in FY 2007, an astonishing increase of 36.4%. This demonstrates how companies like Netflix that offer subscription-based services can scale their businesses without incurring significant additional operating expenses provided that they can avoid customer defections. While sales increased by $208.6 million from FY 2006 to FY 2007, operating expenses only increased by $26.747 million during this same time period. Marketing expenses, the large component of operating expenses, actually saw a slight decrease from $225.524 million in FY 2006 to $218.280 million in FY 2007.

Due to Netflix's solid performance, investors were rewarded with a 36.6% increase in EPS which was $0.97 in FY 2007 versus $0.71 in FY 2006.

Still, Netflix saw a negative gross margin, although it enjoyed slight increases in operating margin and net margin. Operating margin increased by 1.1% from FY 2006 to FY 2007 and net margin increased from 4.9% to 5.6%. Gross margin of 34.8% in FY 2007 was down from 37.1% in FY 2006, a 2.3% decline. The decrease in gross margin was primarily due to an increase in postage rates effective May 2007 and a reduction in the prices of Netflix's most popular subscription plans during the second quarter of 2007 caused by increased competition. The company is anticipating further pressures on gross margin in 2008 due to continued price competition and another slight increase in postage rates.

The company is anticipating a shift from postal delivery to Internet-based delivery of its content in the near future and surviving the transition will be critical to the company's long-term success. It has increased technology and development from $48, 379 million in FY 2006 to $71, 395 million in FY 2007; much of this is for the transition to Internet-delivered content. Netflix's balance sheet indicates its content library as one of its greatest assets other than cash and short-term investments. The value of the content library increased by 26.3% from 2006 to 2007 and is now valued at $132.5 million. Part of the reason for the increase is that Netflix is enhancing the content library with Internet-delivered content.