Netflix (NFLX)

Q2 2011 Earnings Call

July 25, 2011 6:00 pm ET

Executives

David Wells - Chief Financial Officer

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

Ellie Mertz -

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Netflix Second Quarter 2011 Earnings Q&A Session Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded. Now I would like to pass the call over to Ellie Mertz, Vice President of Finance and Investor Relations.

Ellie Mertz

Thank you, and good afternoon. Welcome to the Netflix Second Quarter 2011 Earnings Q&A Session. I'm joined here by Reed Hastings, CEO; and David Wells, CFO.

We announced our financial results for the second quarter at approximately 1:05 p.m. Pacific Time today. The shareholder letter, and the Q2 financial results, and the webcast of this Q&A session, are all available at the company's Investor Relations website at ir.netflix.com.

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

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 18, 2011. A rebroadcast of this Q&A session will be available at the Netflix website after 6:00 p.m. Pacific Time today.

Question-and-Answer Session

Ellie Mertz

Now let's move directly to questions. Similar to last quarter, we have organized the questions by topic as we've received them via e-mail this afternoon. We'll start with questions about the pricing changes we announced just 2 weeks ago. How are you feeling about the price increase 2 weeks since announcing it? Do you expect for some of the subscribers to reign off with the pricing increase, that they will return later once they try other alternatives?

Reed Hastings

This is Reed. Like any customer-driven organization, we feel bad about having customers upset with us. But we feel great about the amazing new content we're going to be able to license in the fourth quarter and next year, which will further propel our growth and our subscriber satisfaction. And the price change takes effect upon each subscriber's renewal in September. So we don't have a full range view of it. But so far from what we've seen, we've been very pleased at the effects, and we're feeling great about the decision as tough as it is, and it's going to allow us to have this fantastic streaming content going forward.

Ellie Mertz

While still early, could you help us understand the initial effects of the subscription plan pricing change so the net effect on subscriber growth, churn, and ARPU?

Reed Hastings

Because of the timing we announced at the very beginning of the quarter, we will see the negative effects of it in Q3. That is the elevated churn and lower revenue growth that we would otherwise have. Then the price increase takes effect essentially mid-September on average. So we get a little bit of benefit at the end of the quarter, and then the real benefit comes in the following quarters, Q4 and beyond. But in terms of tracking where we are and our expectations, we're feeling very good.

Ellie Mertz

Can you tell us what percentage of subscribers have canceled the service? Have you seen subscribers migrate more towards the unlimited premium plans, or towards the DVD plans, or they opt in for both?

Reed Hastings

Well, we're making estimates for the end of the quarter. That's what's in our guidance. And we'll see overtime what the split is. We feel great when you think about it with our DVD service at $7.99. It's an incredible value. It's the lowest priced offer in the market place, it's the best service levels in the marketplace. So if a customer wants DVD rental by mail, we're definitely the place to go. And then in terms of streaming, we've gained increasing confidence over the last 2 years about the viability and strength of a pure streaming plan. We gained some confidence when we launched in Canada and that blew away our expectations with the response. We gained some confidence when we led on our nonmember homepage with streaming only. And as we put in our shareholder letter in Q2, about 75% of subscribers chose streaming only. In other words, even though DVD was only $2 more, 75% stuff was streaming only. And again with this pricing change, we're going to be able to strengthen that streaming plan with more content. So that's why we feel good about it.

David Wells

Just to add on to that, our guidance in the letter shows people the strength of the offerings in the sense that we do feel that most people are taking the hybrid offering. A lot of these hybrid subscribers are staying on both plans and that's implied in both the guidance and the diagram that we put into the letter.

Ellie Mertz

So a follow-up question on timing. Why did you implement the recent pricing changes now when subscriber growth is near the highest you've ever had? Why not wait until you are further into your penetration curve?

Reed Hastings

Well, I think the reason we felt confident about doing it now is the strength of streaming only. Really, we got convinced that we can thrive on streaming only. And with the great new content, we're going to be able to get with this pricing change, the best timing was now.

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