Netflix (NFLX)

Q3 2011 Earnings Call

October 24, 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

Deborah T. Crawford - Vice President of Investor Relations

Ellie Mertz -

Analysts

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to the Netflix Third Quarter 2011 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, VP of Finance and Investor Relations. Please go ahead.

Ellie Mertz

Thank you and good afternoon. Welcome to the Netflix Third 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 third quarter at approximately 5 p.m, Pacific time today. The shareholder letter and the Q3 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 e-mail. Please e-mail your questions to ir@netflix.com . In the time remaining after e-mail 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 call 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.

Now let's move directly to questions. Similar to previous quarters, we have organized the questions by topic as we received them via e-mail this afternoon. We'll start with questions about the domestic business.

Question-and-Answer Session

Ellie Mertz

Given the sub losses in October, why are you so confident that November will be flat and December will have positive net adds for streaming? What does the churn look like week-to-week in October?

Reed Hastings

Now, what we've seen is a second wave of cancellations from the price increase. The first wave was in July upon announcement, and the second wave has been in September and October, as people become more aware of the price increase, and many have changed the plan or canceled. And that wave has been declining very steadily over the past couple of weeks. And so we have substantially less weekly cancels now than we did just 3 to 4 weeks ago. So that's that gives us confidence that it's -- this wave passing through.

Ellie Mertz

Why do you specifically believe your December month domestic net adds will be strongly positive? Do you plan a major marketing campaign to help make this happen?

Reed Hastings

And our marketing has been very successful for the last several years, and we don't plan on any substantial change to it. It's a great set of campaigns that work very well at attracting streaming subscribers. And in Q4, particularly in December, there's more focus on a set of devices, videogaming consoles that get sold, iPads that get sold, a wide range of devices. And so our expectations are modeled from prior year's performance.

Ellie Mertz

Why not reintroduce a combined streaming DVD plan offering at a discount for taking both?

Reed Hastings

Well, as we addressed in the letter, we think the future is brightest by focusing on streaming. We could, in principle, offer discounts for hybrid, but if we were going to use discounting dollars, we wouldn't want to trying to incent more DVD use and subsidizing DVDs, we'd want to be discounting streaming, and focus on getting even more market share. As it turns out, we think that $7.99 streaming is such a great price, but mostly, we should focus on continuing to fill out the content. And so we're really quite comfortable in our growth with the 2 $7.99 programs.

Ellie Mertz

Do you mean to ramp spending to win back sentiment, to drive a virtuous cycle, even if it means lower margins for the next 12 to 18 months, has your programming spend targets for 2012 changed due to the change in subscriber terms? If so, what type of content are you giving up?

Reed Hastings

Well, as we said in the letter, the focus for us is in getting back our reputation and brand strength. But that's not through grand gestures, signing some crazy content deal or doing something else. It's the same set of steps that we've been using year after year for the past 10 years in terms of building our brand, which has a steady focus on execution, improving our service quarter-after-quarter. And in terms of our programming content, we do have built into our plan substantial increases in the content investment over this year and over the prior year. It's really exciting that we're able to fill out that content as we documented in its effect in our letter.

Ellie Mertz

Can you please provide apples-to-apples comparisons for your subscriber guidance? What does it imply on a unique subscriber basis? And how many hybrid subscribers are you assuming for Q4?

Read the rest of this transcript for free on seekingalpha.com