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Netflix, Inc. (NFLX)

Q4 2009 Earnings Call

January 27, 2010 6:00 pm ET

Executives

Deborah Crawford – VP, IR

Reed Hastings – Co-Founder and CEO

Barry McCarthy – CFO

Analysts

Steve Frankel – Brigantine Advisors

Youssef Squali – Jefferies & Company

Ralph Scharkar – William Blair

Aaron Kessler – Kaufman Bros.

Daniel Ernst – Hudson Square

Michael Pachter – Wedbush Morgan Securities

Mario Cibelli – Marathon Partners

Ben Rose – Battle Road Research

Marianne Wolk – Susquehanna Financial Group

Brian Fitzgerald – UBS

Imran Khan – JPMorgan

Scott Devitt – Morgan Stanley

Nat Schindler – BoA/Merrill Lynch

Mark Mahaney – Citigroup

Sandeep Aggarwal – Collins Stewart

Doug Anmuth – Barclays

Michael Olson – Piper Jaffray

Jeetil Patel – Deutsche Bank

Jason Helfstein – Oppenheimer & Company

Mark Harding – Maxim Group

Tony Wible – Janney Montgomery Scott

Heath Terry – FBR Capital Market

Jim Friedland – Cowen and Company

Barton Crockett – Lazard Capital Markets

John Blackledge – Credit Suisse

George Askew – Stifel Nicolaus

Guy-Charles Valois – Galliant Capital

Presentation

Operator

Welcome to the Netflix fourth quarter 2009 earnings conference call. As a reminder, today’s call is being recorded. At this time for opening remarks and introductions, I this time I will turn things over to Ms. Deborah Crawford, Vice President of Investor Relations. Please go ahead ma’am.

Deborah Crawford

Thank you and good afternoon. Welcome to Netflix’s fourth quarter 2009 earnings call. We released earnings for the fourth quarter at approximately 1:05 p.m. PT today. The earnings press release and the webcast of this conference call are available at the company’s Investor Relations Website at ir.netflix.com. In addition, as noted in the earnings press release, management’s commentary on the quarter’s results is also available at our Investor Relations website.

This conference call will consist solely of Q&A. As we have done for the past several quarters we are going to conduct Q&A via email. Please email your questions to me at dcrawford@netflix.com.

We may make forward-looking 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 SEC on February 25, 2009. A rebroadcast of this call will be available at the Netflix website after 6:00 p.m. PT today.

Before moving into Q&A I would like to turn the call over to Reed for some brief opening remarks.

Reed Hastings

Thanks Deborah and welcome everyone to today’s call. As you can tell from our press release and from our commentary we posted on our website, Q4 was a great quarter. Over one million net new subscribers, strong earnings and a significant expansion in streaming. As our guidance for 2010 indicates we expect the momentum to continue.

With that let’s go directly to Q&A.

Question and Answer Session

Deborah Crawford

The first question comes from the line of Steve Frankel – Brigantine Advisors.

Steve Frankel – Brigantine Advisors

Is the bounty paid to the game platform manufacturers materially different than that paid to other customer acquisition channels? Is it higher or is it lower?

Reed Hastings

We don’t disclose individual deals as you probably would expect. But what you can see is that as we have expanded with the various CD platforms including the game platforms that our subscriber acquisition cost has continued to come down nicely. From that you can intuit there is no significant model shift.

Steve Frankel – Brigantine Advisors

Is the decline in SAC driven by more decline in ad rates, increased brand awareness or a reduction in the bounty you are paying for customer acquisitions?

Reed Hastings

Mostly brand awareness and the improvement in the product. The product fundamentally the service is better than it was 2-3 years ago because of the streaming. So that increased attractiveness makes it easier to sell, if you will, that combined with the large scale we are operating at is what is driving down the SAC as opposed to some change in the display ad markets or outside factors.

Steve Frankel – Brigantine Advisors

With HBO, Starz and Showtime so focused on original programming do you expect as their respective studio output deals come up for renewal they will be less willing to lay out large amounts of cash, potentially opening up content for you to acquire?

Reed Hastings

On the first part they have had great success with episodic first HBO then Showtime and most recently Starz where Spartacus just launched and is a huge success for Starz. It hasn’t lowered their appetite for movies. As an example, HBO pioneered episodic probably 7-9 years ago and has continued to renew their deals and be very focused on movie content. We are focused on being a distributor for those services. We are a distributor for Starz now. We would like to be for Showtime, HBO and Epics. That is the relationship that we want as opposed to trying to bid against them. That is just not necessary for us.

Deborah Crawford

The next question comes from the line of Youssef Squali – Jefferies & Company.

Youssef Squali – Jefferies & Company

Will you be renegotiating content rights with the studios along the lines of what you have done with Warner Bros. for [day and date] releases? Help us understand the cost benefit to you.

Reed Hastings

I will broaden the question flatly to the 28 day question which is why did we do the Warner deal. I don’t think it impacts the streaming directly. With Warner Bros. they wanted to create a window to improve sell through. As you well know in the book industry there is hard cover books for awhile and then paperback. That is a proper profit maximization strategy. They, and I think quite reasonably, would like to have DVDs for sale at Amazon, Wal Mart, Best Buy, etc. for some period of time before they are available for rental. We were willing to agree with them to work within that system which we hope and they hope will improve DVD profits and the DVD ecosystem. For us most consumers are not sure if DVDs come 90 days after the theatrical release, 120 days, 150 days, 180, it is all over the map. It constantly changes not only between studios but also between specific releases. So there is not a high expectation of any perfect day when it is supposed to be out.

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