2013



Management’s Discussion and Analysis of Financial Condition and Results of Operations



Overview

We are the world’s leading Internet television network with more than 44 million streaming members in over 40 countries enjoying more than one 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 United States ("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 (loss) and operating segment contribution profit (loss) targets.



Results of Operations

The following represents our consolidated performance highlights:

Consolidated revenues for 2013 increased as compared to prior years due to growth in international and domestic streaming memberships. Operating income and net income increased as compared to prior year by $178.4 million and $95.3 million, respectively, due to the increase in revenue, partially offset by an increase in the cost of revenues due to continued investments in existing and new streaming content.

Free cash flow was $128.7 million lower than net income for the year ended December 31, 2013. The excess of net income over free cash flow has increased from $75.3 million and $39.6 million in the years ended December 31, 2012 and 2011, respectively. The increases are primarily the result of increased investments in original content or content that is licensed in an earlier window through an output arrangement which will typically, depending upon the terms, require more up-front cash payments relative to the expense.



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



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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