Netflix (NFLX)
Q2 2012 Earnings Call
July 24, 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
Anthony J. DiClemente - Barclays Capital, Research Division
Mark S. Mahaney - Citigroup Inc, Research Division
Jason S. Helfstein - Oppenheimer & Co. Inc., Research Division
Anthony Wible - Janney Montgomery Scott LLC, Research Division
Barton E. Crockett - Lazard Capital Markets LLC, Research Division
Andy Hargreaves - Pacific Crest Securities, Inc., Research Division
Douglas Anmuth - JP Morgan Chase & Co, Research Division
Nathaniel Schindler - BofA Merrill Lynch, Research Division
Heath P. Terry - Goldman Sachs Group Inc., Research Division
Richard Kang
Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division
Presentation
Operator
Good day, everyone, and welcome to the Netflix Second Quarter 2012 Earnings Q&A Session. [Operator Instructions] 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 Second 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 second quarter at approximately 1 p.m. Pacific Time today. The shareholder letter and the Q2 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 email. Please email your questions to ir@netflix.com. After email Q&A, we will also open up the phone lines in case there are 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'd like to get in 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 the 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 today.
Now let's move directly to questions.
Question-and-Answer Session
Ellie Mertz
[Operator Instructions] .
So we're going to start with questions about subscriber metrics and our guidance. First question. How closely tied are hours viewed per subscriber and your subscriber metrics especially churn? Has there been any material improvement in customer churn in domestic streaming? If not, why does not the higher engagement reflected in the higher hours translate into improved churn?
Reed Hastings
Well absolutely, viewing and retention are connected. The more a subscriber uses Netflix, the more that they stay a subscriber as you would expect, and there's a significant variation between those who watch an hour a month, 10 hours a month and 50 hours a month. And so, we're always trying to improve the experience, more content, better viewing, better streaming to increase the amount of viewing because then, subscribers prioritize the $7.99 for Netflix above other expenses.
Ellie Mertz
You said in the letter that Netflix's goal was to become the world's most popular TV and movie service. Presumably, you're defining success by the number of global streaming subscribers. The bears [ph] believe Netflix that cannot become this large because at $8 a month, the company cannot compensate the content providers enough. Can you comment on this?
Reed Hastings
Well, we've been charging $8 a month for streaming for several years and we've continued to grow the subscriber growth and to grow the content. And we're basically continuing to execute on that game plan, and that's helped us grow very considerably. So I don't see what the issue is per se with an $8 service if you get a lot of members, and that's what we're focused on: to be able to continue to build out the content.
Ellie Mertz
On guidance, I'm curious about the Olympic impact comment. In previous Olympics, how much did the games impact subscriber growth?
Reed Hastings
Well, it's hard for us to gauge the Beijing 2008 Olympics because we had a 3-day DVD outage right at the same time. I would say that we did feel some impact and there's uncertainty around whether that impact is permanent, meaning it's just a permanent reduction in acquisitions or if it's just a deferral through the games. So I would say that through the first 3 weeks of 2012, we would have expected to be above 2010 levels, and what we're seeing is that we're nearly at 2010 levels, so it gave us some more uncertainty in terms of what Q3 would look like in terms of being at a 2010 level of 1.8 million net addition.
Ellie Mertz
A related question. You talked about some of the headwinds you're facing on subscribers, including the Olympics this summer. Given these headwinds, what will it take to reach your full year goal for net adds? Another question, what are the risks in Q4 net add guidance to make that 7 million number?
David Wells
Well, I think there's a number puts and calls. There's Netflix's reputation. As that continues to build back, there's improvements that we make between now and Q4. Then there's all the Smart TV sales that all the manufacturers are very focused on Q4. So those would be all the positives. Negatives would be if there's a substantial new competition between now and then, other factors like that. Economic issues don't tend to affect us much because we're so -- such a good value so I don't think we have much risks on up and downs in the economy.
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