Netflix (NFLX) Q1 2012 Earnings Call April 23, 2012 6:00 pm ET Executives Ellie Mertz - Reed Hastings - Founder, Chairman, Chief Executive Officer, President and Member of Stock Option Committee David Wells - Chief Financial Officer and Chief Accounting Officer Analysts Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division Mark S. Mahaney - Citigroup Inc, Research Division Richard Greenfield - BTIG, LLC, Research Division Anthony J. DiClemente - Barclays Capital, Research Division Heath P. Terry - Goldman Sachs Group Inc., Research Division Douglas Anmuth - JP Morgan Chase & Co, Research Division John R. Blackledge - Crédit Suisse AG, Research Division Scott W. Devitt - Morgan Stanley, Research Division Barton E. Crockett - Lazard Capital Markets LLC, Research Division Presentation Operator Good day, everyone, and welcome to the Netflix First Quarter 2012 Earnings Q&A Session. Today's call is being recorded.
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 10, 2012. 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. Question-and-Answer Session Ellie Mertz [Operator Instructions] For the first topic we'll take questions on is domestic streaming. First question. Why are you so confident that gross add trends result from seasonality and not slowing growth? How can you be confident in 7 million net additions for the year? Reed Hastings Well, we had a fantastic Q1, adding nearly 3 million members to our global subscriber base. We had strong results in all of our territories, including the U.S. Our gross adds are consistent with our historic patterns. Our churn is consistent with our historic patterns, and we're feeling very good about the year. If you look at adding 7 million net adds, which is our target for the year, and you compare that to 2010 where we also added 7 million net adds, in 2010, that was 7 million on top of 12 million starting members. This year, that 7 million on top of 22 million starting members. If the mathematical effect, if that's true, with steady churn, that in adding 7 million on top of 12 million versus 7 million on top of 22 million, that there will be a significantly increased seasonality of net additions. So the business is performing exactly as we had hoped. We are continuing to execute on all of the key dimensions. But the artifact of having 7 million net adds on 22 million increases the seasonality relative to 2010, and we tried to demonstrate that or illustrate that in our appendix showing this phenomenon. So everything is consistent with what we've been hoping for, and so that's why we feel good about the year, continuing like this. It's probably secondarily all of the macro factors are very good, which is broadband is continuing. We're getting better and better content. Viewing is at record levels, and consumers want click and watch on-demand Netflix Internet television.
Ellie MertzA follow-up question to that. What will be the earliest indicators that you can or can't achieve that 7 million net U.S. streaming subs goal for 2012? David Wells I think the earliest indicators will be our net additions in Q2 going into Q3. So when looking at as we continue to see the same net addition rate both with the strength of the new members that we're bringing on to the space and the user engagement that we see both with new members and existing members, if those trends continue forward, we would expect to be continually confident in our ability to add 7 million members. Ellie Mertz Can you discuss the rate within the quarter of subscriber additions or their seasonality within the quarter? Reed Hastings Those seasonality, if you want, there's variation month-to-month, week-to-week that follows pretty typical patterns. And all of those patterns have stayed consistent -- are going consistently. And again, the main consternation that we picked up is while the growth adds are steady and following the traditional seasonal patterns, why is the net adds different? Why are the net adds diverging? And the answer is just a factor of, I'll slightly repeat myself of the math of, it's on top of 22 million instead of on top of 12 million that we tried to demonstrate in the appendix the way that works. Do you want to add anything in? Read the rest of this transcript for free on seekingalpha.com