Netflix, Inc. Q1 2010 Earnings Call Transcript

Netflix, Inc. Q1 2010 Earnings Call Transcript
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Netflix, Inc. (NFLX)

Q1 2010 Earnings Call

April 21, 2010 6:00 pm ET

Executives

Deborah Crawford – VP, IR

Reed Hastings – Co-Founder and CEO

Barry McCarthy – CFO

Analysts

Steve Frankel – Brigantine Advisors

Youssef Squali – Jefferies & Company

Mark Mahaney – Citigroup

Ryan Hunter – Wedge Partners

David Miller – Carris & Company

Doug Anmuth – Barclays Capital

Tony Wible – Janney Montgomery Scott

Mark Harding – Maxim Group

Ben Rose – Battle Road Research

Wayne Change – Canaccord Adams

Melinda Davies – Susquehanna Investment Group

Ralph Scharkar – William Blair

Edward Williams – BMO Capital Markets

Jason Helfstein – Oppenheimer & Company

Scott Devitt - Morgan Stanley

Andy Hargreaves - Pacific Crest

Barton Crockett - Lazard Capital Markets

Michael Olson - Piper Jaffray & Co

Daniel Ernst - Hudson Square Research

Brian Fitzgerald - UBS

Nat Schindler - B of A

Imran Khan - J.P. Morgan

John Blackledge - Credit Suisse

Richard D. Skaggs - Loomis, Sayles

Mario D. Cibelli - Marathon Partners

Presentation

Operator

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Good day everyone and welcome to the Netflix first quarter 2010 earnings Q & A session. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Deborah Crawford, Vice President of Investor Relations. Please go ahead.

Deborah Crawford

Thank you and good afternoon. Welcome to Netflix’s first quarter 2010 earnings Q & A session. We released earnings for the first quarter at approximately 1:05 p.m. PT today. The earnings press release, management’s commentary on the quarter’s results and the webcast of this Q & A session are all available at the company’s Investor Relations website at IR.netflix.com.

Like last quarter, this call will consist solely of Q & A and we are going to conduct the Q & A via email. Please email your questions to ir@netflix.com. Please note that this is a new email address from previous quarters.

We may make forward-looking 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 SEC on February 22, 2010. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 p.m. PT today.

Before moving into Q&A, I would like to turn the call over to Reed for opening remarks.

Reed Hastings

Thanks Deborah and welcome everyone to today’s Q & A session. Q1 was another outstanding quarter. We saw record net sub-additions, the lowest SAC and churn in our history and EPS grew 59% year over year. At the same time, the percentage of our subscribers streaming movies and TV episodes in the last 90 days grew to 55%.

This was driven by the progress we’ve made in enhancing our streaming content offering, expanding the breadth of Netflix enabled devices, and improving the user interface. As our guidance for the remainder of 2010 indicates, we expect our momentum to continue. So with that, let’s go over to the questions.

Question and Answer Session

Deborah Crawford

The first question comes from the line of Steve Frankel – Brigantine

Advisors.

Steve Frankel – Brigantine Advisors

Can you share any insights into the viewing habits of watch instantly customers? How many times per month does a typical user stream? Have you seen any material impact on disc usage? Is the viewing skewed materially to TV content?

Reed Hastings

Steven, it’s Reed here. Think of the distribution of instant watching users like any normal distribution. There are some people who barely use it; there are some that use it a lot. It is pretty typical, normal distribution. TV and movies; it is more towards TV than DVD, but movies are still the majority. We are continuing to strengthen the TV side.

What was the last part, usage? On the usage part it appears that we’re seeing some substitution of DVD rental for streaming.

Deborah Crawford

He had a second question.

Steve Frankel – Brigantine Advisors

What is the largest competitive threat facing Netflix today; Kiosk vendors, digital VOD, or traditional cable VOD?

Reed Hastings

Well Steven there are a lot of competitive threats and it’s always hard to figure out what the biggest ones are. Certainly cable, satellite, Telco, MSO; just improving their product is the biggest one. The better, more on demand, more HD TV everywhere; they are continuing to improve that. That is a competitor for time at least. Then there’s the potential emergence of direct competitors, who refer to Hulu to see what the do and potentially others over time.

TV shows and movies is a very, very broad competitive set. The upside is it is a very big market.

Deborah Crawford

The next question is from Youssef Squali

Youssef Squali – Jefferies & Company

What do you believe is the likely impact of the postal service going from six-day delivery to five-days on your DVD by mail business?

Reed Hastings

Youssef, here we are not particularly concerned as our streaming grows. We will be less and less sensitive to particular postal variations. The soonest they are talking about it actually taking effect would be the middle of next year. So it is not a good thing for us. We hope they hold off as long as possible, but we are also cognizant of the total health of the USPS is at stake and they need to make changes.

Deborah Crawford

He had a second question.

Youssef Squali – Jefferies & Company

What kind of adoption are you seeing on the Wii platform since its launch? Would the cost be higher or lower than your average?

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