Netflix (NFLX)

Q4 2011 Earnings Call

January 25, 2012 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 -

Analysts

Matt Schechter - Center for Financial Research & Analysis, Inc.

Richard Greenfield - BTIG, LLC, Research Division

Andy Hargreaves - Pacific Crest Securities, Inc., Research Division

Mark S. Mahaney - Citigroup Inc, Research Division

John R. Blackledge - Crédit Suisse AG, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Douglas Anmuth - JP Morgan Chase & Co, Research Division

Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division

Scott W. Devitt - Morgan Stanley, Research Division

Anthony J. DiClemente - Barclays Capital, Research Division

Presentation

Operator

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Good day, everyone, and welcome to the Netflix Fourth Quarter 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 Ms. Ellie Mertz, Vice President of Finance and Investor Relations. Ma'am, you may begin.

Ellie Mertz

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

We announced our financial results for the fourth quarter at approximately 1 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 ir.netflix.com.

As is our standard practice, we will begin the call with questions received via email. Please email your questions to ir@netflix.com. In the time remaining after email Q&A, we will also open up the lines to take live follow-up questions. The dial-in number is within our investor letter, but let me repeat it now. Please call (760) 666-3613 if you would like to get in the queue.

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 p.m. Pacific Time today.

Before moving directly to questions, I'd like to turn it over to Reed Hastings for any opening remarks.

Reed Hastings

Just jump over to questions, Ellie.

Ellie Mertz

All right, let's move directly to questions.

Question-and-Answer Session

Ellie Mertz

So as with previous quarters, we've organized the questions by topic as we receive them this afternoon. So we're going to start with general content questions. First question. Can you help us better understand the fixed versus variable components in the content deals you are signing, or how the industry is maybe moving more towards variable mechanisms as content owners better understand digital?

David Wells

This is David. We have been bidding in an industry that was set up before us by the cable, satellite and paid television world. So all of our deals are fixed. And that reflects the nature of the market that we're competing in. It's been like that for 10-plus years.

Ellie Mertz

What is your appetite for bidding against HBO for film studio content in the pay TV window when the pay TV studio deals come up for renewal? Assuming linear and over-the-top rights for those deals are decoupled, would you attempt to acquire both as you did in the case of DreamWorks?

Reed Hastings

I don't think it's likely that those rights will be decoupled. So we'd be bidding for the -- and that's because HBO, as an example, would certainly want both. So if we are to win the bidding, we have to really be willing to bid for both as we did in DreamWorks, Relativity. And yes, we will continue to be active bidder in that market.

Ellie Mertz

Are you relatively comfortable with your current levels of content, or is Netflix still on the market for Blockbuster-size content deals? Do you anticipate that a potential slowdown in content acquisitions will have a meaningful impact on new subscriber acquisitions?

Reed Hastings

We're rapidly increasing the amount of money that we spend on content domestically and internationally. The only thing that's slightly different is this quarter, we're increasing our spend over a year ago over 100%. So it's more than double one year ago. And that year-over-year increase is declining. But it's still a substantial increase on a year-over-year basis all through this year. And the question is are we comfortable with the content? We always want to get more content. That's the virtuous cycle, which is as we get more subscribers, we're able to get more content, which then helps us get more subscribers. So we'll continue to invest in improving the service by adding more content for a very long time.

David Wells

And just to add on to that, it's not just about expanding -- adding new content. As we discussed in the letter, that increase in expense is somewhat a small portion for renewals but actually is for new content to the service. So it's going to be exciting as we add new titles to the service through 2012.

Ellie Mertz

How should we think about subscription costs as a percent of revenue for 2012 and longer term?

Reed Hastings

Well, that will vary by market and maturity. What we -- think about it as contribution margin and contribution profit. And as we talked about, we did better in Q4 than we expected, and so we're taking up our target for 11% for Q1 for contribution margin in the U.S. In our different international markets, we're still contribution margin negative. And that's -- the losses will abate into the market as it grows and breaking into contribution margin positive.

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