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Netflix Inc. (NFLX)

Q3 2010 Earnings Call Transcript

October 20, 2010 6:00 pm ET

Executives

Deborah Crawford – VP, IR

Reed Hastings – Founder, Chairman & CEO

Barry McCarthy – CFO

Analysts

Youssef Squali – Jefferies

Mike Olson – Piper Jaffray

Mark Mahaney – Citi Investment Research

Steve Frankel – Dougherty & Company

Nat Schindler – BofA-Merrill Lynch

Ryan Hunter – Wedge Partners

Jason Cheu – ABR Investment Strategy

George Askew – Stifel Nicolaus

Ben Rose – Battle Road Research

Jason Helfstein – Oppenheimer

Daniel Ernst – Hudson Square Research

Brian Fitzgerald – UBS

Andy Hargreaves – Pacific Crest

Wayne Chang – Canaccord Genuity

Jim Friedland – Cowen

John Blackledge – Credit Suisse

Barton Crockett – Lazard Capital Markets

Michael Pachter – Wedbush

Doug Mitchelson – Deutsche Bank Securities

Edward Williams – BMO

Scott Devitt – Morgan Stanley

Eric Wold – MCF

Tony Wible – Janney Montgomery Scott

Arthur Mangriotis – Fox Point Capital

Doug Anmuth – Barclays

Doug Robinson [ph]

Presentation

Operator

Good day, everyone, and welcome to Netflix third quarter 2010 earnings Q&A session. Today's call is being recorded. At this time for opening remarks and introductions, I'll turn the call over to Deborah Crawford, Vice President of Investor Relations. Please go ahead.

Deborah Crawford

Thank you and good afternoon. Welcome to the Netflix third quarter 2010 earnings Q&A session. We released earnings for the third quarter at approximately 1.05 PM Pacific Time today. The earnings press release, management's commentary on the quarter's 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, this call will consist solely of Q&A and we are going to conduct the Q&A via email. Please email your questions to ir@netflix.com. 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 22nd, 2010. A rebroadcast of this Q&A session will be available at the Netflix website after 6.00 PM Pacific Time today. With that, let’s begin the Q&A session.

Question-and-Answer Session

Deborah Crawford

The first question is from Youssef Squali of Jeffries. How important is exclusivity of content in Netflix when doing digital deals?

Reed Hastings

Youssef, it’s Reed here. It’s not inherently important to us, but many of the other buyers are exclusive and I am interested in non-exclusive content. But we end up doing exclusive sometimes basically to play with the way that market is today. And that has some benefits for us also. But it’s not yet a core strategy. Over a sufficient number of years, it could become a core strategy, but we haven’t made that determination.

Deborah Crawford

Second question from Youssef. What is the percentage of the subscriber base that get Blu-ray today versus one year ago?

Reed Hastings

Youssef, it’s up from a year ago, but it’s pretty flat in recent quarters. So, now it’s still a nice little part of the business and it’s fine for us.

Deborah Crawford

The next question is from Mike Olson at Piper Jaffray. What are your thoughts on pricing? I realize you are in grabbing share mode, but I think it’s occurred to us churn would not be significantly impacted by a $1 per months price increase. And you could argue that higher pricing would allow you to spend more on new content, thereby attracting new sets and reducing churn. How are you thinking about this?

Barry McCarthy

It’s Barry. You know from previous calls in response to questions about pricing we had frequently reminded our listeners that we are testing all the time and some of you (inaudible) price test in the marketplace currently. Obviously, the pricing in Canada is working off for us and may be that will or will not play for us in the U.S. and as we continue to read test results, we’ll continue to update our thinking about pricing.

Deborah Crawford

The next question is from Mark Mahaney at Citi Investment Research. Would you expect the relatively higher mix of TV show consumption via streaming versus via DVD to continue going forward or do you expect it to come down as you build out more movie selection? Is there something about streaming usage that tends to lend itself more to quick TV show consumption?

Reed Hastings

Mark, I’d say that we’re trying to figure out what next consumers want as opposed to trying to guide that and so we are trying to get a broad selection of content both in movies and in TV shows. And currently, the subscribers (inaudible) in about equal proportion and the way we measure it is by – not by stream starts or session starts, but by total minutes watched. So, movies get a little bit of an advantage in minutes watched because they are longer. But we are not trying to drive it one way or the other. We are just trying to build out a whole lot of content that our subscribers want to watch.

Deborah Crawford

Second question from Mark Mahaney. Are there earlier indications that recent free subscribers convert to pay subscribers at the same rate as they have for you historically?

Reed Hastings

Sorry, is the question, is the P1 conversion rate whole and constant with historical levels, answer to that question is yes.

Deborah Crawford

Our next question is from Steve Frankel at Dougherty & Company. You commented that the increase in free subscribers was a reflection of both faster U.S. growth and the initial push into Canada. Do you expect free subs to remain at these higher levels relative to the historical norm or will it normalize in the next quarter or two?

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