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Netflix (NFLX)

Q4 2010 Earnings Call

January 26, 2011 6:00 pm ET


David Wells - Chief Financial Officer

Erin Kasenchak -

Deborah Crawford - Vice President of Investor Relations

Reed Hastings - Founder, Chairman, Chief Executive Officer, President and Member of Stock Option Committee



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Good day, everyone, and Welcome to the Netflix Fourth Quarter 2010 Earnings Q&A Session. At this time, for opening remarks and introductions, I will turn the call over to Deborah Crawford, Vice President of Investor Relations. Please go ahead.

Erin Kasenchak

Thank you, and good afternoon. Welcome to the Netflix Fourth Quarter 2010 Earnings Q&A Session. We announced our financial results for the fourth quarter at approximately 1:05 p.m. Pacific time today. The shareholder letter and the Q4 financial results and the webcast of this Q&A session are all available at the company's Investor Relations website at

As is our standard practice, this call will consist solely of Q&A and we are going to conduct the Q&A via e-mail. Please e-mail your questions to

We may make forward-looking statements during this call regarding the company's future performance. Actual results may differ materially from these statements due to risks and uncertainties related to the business. A detailed discussion of such risks and uncertainties is contained in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed with the Commission on February 22, 2010. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 p.m. Pacific time today. Before we begin the Q&A, I'd like to turn the call over to Reed.

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Reed Hastings

Thanks, Deborah. I'd just like to acknowledge that Darren McCarthy has been our CFO and my partner for the last 11 years, and there's no way we would've gotten to 20 million subscribers as fast as we did without his incredible work. And I'm thrilled to be able to introduce to you, David Wells, who's our new CFO.

David Wells

Great. Thanks, Reed. This is David. I'm glad to be joining on the earnings call this afternoon. I've got quite a legacy to follow. I've been part of the Netflix team for seven years and in the background of this call for many of those years. So I look forward to speaking to many of you in the coming weeks. But I know that you're here for Q&A, so let's get to questions.

Question-and-Answer Session

Deborah Crawford

The first question is from Youssef Squali of Jefferies & Company. How should we think about overall content spend in 2011 versus 2010 mix of international and domestic digital rights?

David Wells

Youssef, I can actually take that. This is David. I think you should mostly think of it as domestic. If you think about the guidance that we gave for Q1 and you scale that for Q2, and you think about the $50 million operating loss we talked about in Q3 and 4, it's not hard to get to a position where most of that spend is domestic.

Deborah Crawford

The next question is from Arthuros Mangriotis at Fox Point Capital Management. Please elaborate on your decision to reduce focus on churn. Even though net additions are ultimately the important statistics, I would've thought that managing churn would be a great way to make sure you are satisfying your customers.

Reed Hastings

Arthuros, it's Reed here. I guess, I'd say, you don't really manage churn. You manage satisfaction. And then from higher satisfaction comes more word-of-mouth, driving SAC down and new starts up and churn down. And what I've come to realize over the years is that net adds is really the best indicator of that. And this evolution in our part reflects an internal evolution over the past couple of years, where I find myself not particularly paying attention to churn in fact and much more than net adds, which again is the best indicator of the satisfaction. And so that's the underlying reason for the evolution.

Deborah Crawford

The next question is from Heath Terry at Canaccord Genuity. How do marketing deals like the Netflix button on remote controls compare to your existing subscriber acquisition cost level?

Reed Hastings

Heath, we don't know for sure yet, because I guess we would say, we don't know the effectiveness of the buttons. It feels like a great option. And once they're in the market, which should be in the middle of this year and then more later in the year, we'll be able to study really how much consumers use them. So we're optimistic on it. We think it's a great direction, but we don't have any hard evidence yet and we won't probably for a year.

Deborah Crawford

Second question from Heath. Is the improving market for online advertising impacting your online SAC level?

Reed Hastings

Not substantially, Heath. It's been pretty steady for us. The big thing that improved SAC is that we didn't spend that much on marketing in the quarter, because it was earning so much on streaming. And when you spend less on marketing, you can think of it skimming the market or you can think of it as we get the flow over from the prior quarters kind of brand build up, it carries us. And when we go into Q1, we'll spend a little more in marketing. In fact it'll be a little higher. So it's generally in the right direction but not as low as it was in Q4.

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