Netflix, Inc. (NFLX)
Q2 2010 Earnings Call
July 21, 2010 06:00 pm ET
Erin Kasenchak - Senior Manager, IR
Reed Hastings - CEO
Barry McCarthy - CFO
Steve Frankel - Brigantine Advisors
Dave Miller - Caris & Company
Youssef Squali - Jeffries & Company
Ryan Hunter - Wedge Partners
Ben Rose - Battle Road Research
Dan Ernst - Hudson Square
Jeff Rath - Canaccord
Nat Schindler - BofA-Merrill
Jason Helfstein - Oppenheimer
Scott Devitt - Morgan Stanley
Doug Anmuth - Barclays
Mark Mahaney - Citigroup
George Askew - Stifel Nicolaus
Ralph Scharkart - William Blair
Tony Wible - Janney Montgomery Scott
Justin Patterson - Morgan Keegan
Wayne Chang - Canaccord
Barton Crockett - Lazard
Mike Olson - Piper Jaffray
Imran Khan - JPMorgan
Brian Fitzgerald - UBS
John Blackledge - Credit Suisse
Ed Williams - BMO
Jim Friedland - Cowen
Andy Hargreaves - Pacific Crest
Heath Terry - FBR
Good day everyone and welcome to Netflix second quarter 2010 earnings Q&A session. Today's call is being recorded. At this time for opening remarks and introductions, I'll turn the call over to Erin Kasenchak, Director of Investor Relation. Please go ahead.
Thank you and good afternoon. Welcome to the Netflix second quarter 2010, earnings Q&A session. We released earnings for the second quarter at approximately 1.05 PM Pacific Time today. Earnings press release, management's commentary on the quarter's results and the webcast of this Q&A session are available at the company's Investor Relations website at ir.netflix.com.
Like last quarter, this call consists solely of Q&A and we are going to conduct the Q&A via email. Please email your questions to firstname.lastname@example.org. 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 22nd, 2010. A rebroadcast of this Q&A session will be available at the Netflix website after 6.00 PM Pacific Time today. Before moving into Q&A, I would like to turn the call over to Reed for a few opening remarks.
Welcome everyone and let's just jump in with question, Erin.
Great, first question is from Steve Frankel at Brigantine Advisors. Will the recent content deal with Relativity Media signal a material increase in the overall content expenditures or a continuation of the trend of shifting investment from physical to digital?
Steven, it's a little of both, we have been investing more in streaming content, quarter-after-quarter, year-after-year, as we get revenue growth and confirmation that the streaming content investment is a smart one. And Relativity does indicate a material step up in that, most of that doesn't come in until Relativity delivers the films so that would be next year and beyond. So it's a material step up this year for Relativity. But we are out looking for more content and unique to Relativity is that it’s completely exclusive for internet subscription to Netflix, so it's the first essentially a shift in our strategy which is to also be licensing exclusive content in addition to non-exclusive content. We don't see a big radical shift. It's a thing we are doing some of the content on movies and TV shows exclusively now which as you know is open to new parts of content of availability because much of the content in the pay-TV window is sold exclusively.
And second question is what is the percentage of subscribers on Blu-ray plan?
Steve, it's a little over 10%.
Great, next question from Dave Miller of Caris & Company. Can you confirm whether or not the introduction of the iPad app has resulted in additional subs beyond your expectation or whether the Netflix app has resulted in already existing subs acquiring iPad?
Well Dave, every new platform whether that's the Wii, the iPad, all of the platforms, do both. They help us with existing subscribers getting more value from the Netflix service and they help us attract new subscribers and the iPad was big success for us as the Wii was and as really all of our platforms have been.
Next question from Youssef Squali at Jeffries & Company. How is the rate of activations on the Wii versus what you have seen for the Xbox in the first 90 days?
Youssef, we don't break out platforms specifics. But I would say that we were very happy with Xbox when it came out and we've been very happy with the PS3 and now we're very happy with Wii. They all have large install bases and that's a meaningful way for our subscribers to get value from our service, and watch great movies and TV shows.
The second question, is there a subscriber segment? Is there a sub-segment of subscribers who only stream the service and stop ordering DVDs? If so, can you quantify?
The majority of subscribers do both stream and take DVDs.
Next question from Ryan Hunter at Wedge Partners. Are marketing expenses associated with the Canadian expansion already factored into your operating margin guidance for 2010?
Yes, it is.
And what percentage of your CDM partners will support Canadian subscribers?
Assuming that you meant CDN, in which case there is no real issue of the internet, our providers such as Akamai and Limelight and others that's out in Canada.
Great next question's from Ben Rose at Battle Road Research. As Netflix gears up to enter the Canadian market and for similarly other foreign markets, what is the most significant content delivery challenge facing the company? Do you expect higher content delivery unit costs than you have in the US?