Netflix's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Netflix (NFLX)

Q1 2012 Earnings Call

April 23, 2012 6:00 pm ET


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


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



Good day, everyone, and welcome to the Netflix First Quarter 2012 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 Ellie Mertz, Vice President of Finance and Investor Relations. Please go ahead.

Ellie Mertz

Thank you, and good afternoon. Welcome to the Netflix First Quarter 2012 Earnings Q&A Session. I'm joined here by Reed Hastings, CEO; and David Wells, CFO. We announced our financial results for the first quarter at approximately 1 p.m. Pacific Time today. The shareholder letter and the Q1 financial results and the webcast of this Q&A session are all available at the company's Investor Relations website at

As is our standard practice, we will begin the call with questions we received via email. Please email your questions to After email Q&A, we will also open up the phone lines in queue for additional questions not covered by the email Q&A or letter. 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 into 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 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 Mertz

A 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?

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