PSound
04-25-09, 02:15 PM
Some great info in these calls. I highlighted some of the stuff related to streaming, but would recommend people read the entire transcript as there is very interesting data on other distribution methods.
As I say on each of these calls, our goal is to grow subscribers and earnings every year while expanding into streaming video. We continued to execute well against that goal in Q1 and Netflix in on track for a record year in 2009 on all dimensions.
In Q1 we grew subscribers from 9.4 to 10.3 million. The 920,000 net additions were the largest in our history and we're 20% higher than Q1 a year ago.
Net income grew to $22 million, up 68% from the prior year.
EPS grew to 37%, up 76% from a year ago.
While it's clear that instantly streaming movies and TV episodes to subscribers' laptops and TVs is energizing our growth, what is also happening is that our subscribers in total are renting more DVD and Blu-ray movies than ever. In fact, not only did our DVD shipments grow on a year-over-year basis but our year-over-year disk shipments grew more in Q1 than the prior year Q1. We believe Netflix DVD and Blu-ray rental will continue to grow for many years as video stores close and as consumers get increasingly comfortable with e-commerce and the Netflix unlimited rental offering.
Even the physical shipments will grow for many years. We are continuing to invest in our disk operations. For example, we recently moved our central operations distribution center, where we receive disks from the studios' replicators, from Sunnyvale, California to a lower-cost and larger space outside Columbus, Ohio.
Another investment example is that we've been working for the past few years on perfecting automated optical inspection for returned disks to more accurately determine which disks should be discarded, repaired or sent back out to another subscriber, and now we're finally beginning the nationwide rollout of that system. This automated inspection of returned disks will improve our subscriber experience and reduce the number of disks we scrap.
With the strong growth in Blu-ray we felt Q1 was the right time to put in place more realistic Blu-ray pricing. We landed on the 20% to 25% premium for high-definition Blu-ray, which is in line with the high-definition premium consumers pay in other channels but is less, unfortunately, than the price premium we currently pay to some studios for Blu-ray relative to DVD. If we can get our Blu-ray cost premium more in line with what consumers are willing to bear relative to DVD, then we can be much more aggressive in promoting Blu-ray adoption to our 10 million plus subscriber base. This is the critical time period for Blu-ray and we hope to be able to make more progress this year and play an even larger role in the success of Blu-ray.
The key takeaway here is that there is still a lot of growth in rental by mail. The studios clearly have a vested interest in extending the life of DVD and Blu-ray and that's good for Netflix as well. Our subscribers are drawn by our library of more than 100,000 titles with a user-friendly interface that helps our customers find TV shows and movies they will love. Bundling that offering with a growing selection of streaming content for one low subscription fee gives our subscribers a seamless way to expand their habits to include Internet delivery, and that gives us a significant competitive advantage as streaming gains traction.
Despite kiosk growth, however, we had a record quarter and we expect to have a record year because our differentiators continue to be our vast selection - over 100,000 titles - the convenience of mail and streaming, that you don't have to drive anywhere to receive or return a Netflix disk, and our unlimited rentals for one flat fee.
Turning to streaming, the overall consumer embrace of online video is growing rapidly. Between Netflix, MLB.com, Hulu, YouTube, Amazon, Apple and others, consumers are watching more and more online video and the quality of that video is improving. It's not hard to believe that online video will grow substantially every year for a very long time in the same way that cell phone minutes and browser usage have grown steadily over long periods of time. Laptops are getting cheaper and faster and smaller. Streaming to TV screens is also growing, as we and others are getting simple software clients built into a wide range of consumer electronic devices.
It's important for Netflix at this early stage be spending aggressively on streaming content in order to ensure we are well positioned as the industry evolves, but that means we are essentially buying many titles twice now. We buy a title once on DVD and Blu-ray and then we buy it again later for streaming, even though at that point we usually have many excess physical units of that title in our distribution centers. It's great for content owners and okay for Netflix since we save so much on postage and handling.
In Q1 we continued to make good progress on expanding our streaming content, recently adding, for example, the first nine seasons of the animated hit, South Park. We licensed both TV shows and movies from the networks and studios. Many of the movies are not able to be licensed directly from the studios because the studios have licensed the big movies exclusively to networks such as Starz.
Our belief is that since these networks have never missed an opportunity to expand distribution starting with cable, then adding satellite and then telco, all of which compete with each other, that the networks will look to grow their distribution via Internet retailers such as Netflix in the years to come. This will help grow those networks' revenues by reaching new audiences of Internet-centric customers and will contribute to the overall health of the channel distribution business, the benefit of which comes to the content creator in higher content fees.
We are looking to a day when we have plentiful movie and TV show content for streaming. By us carrying entire channels, like we do today with Starz Play, the online version of Starz, and by us licensing the content from the channels like we do now with NBC, CBS, The Disney Channel, Nickelodeon, Comedy Central, and others, we will simply be a fourth option for consumers and a fourth and growing revenue source for networks and studios.
Strong content also has the benefit of making our service more attractive to consumer electronics companies and we are buried with requests to embed our software in a wide range of devices. It will take us some time to get it all delivered, but it's possible that within a few years nearly all Internet-connected CE devices sold will include a Netflix streaming client.
When we think about the right amount to spend on streaming content each year, we consider the benefits of the CE deals because it helps us get those CE deals as well as the retention benefits from more viewing, the acquisition benefits of more subscribers, and the cost benefits of DVD shipment substitution. Given our momentum to date, we are continuing to push up our streaming spending, consistent with our earnings goals, which Barry will elaborate on.
It's easy focus on the Internet as an efficient technology for content delivery, but the broader aspect of the Internet is as a social medium, with a sense of community. The future of Internet television is not 1,000 linear channels where the transmission layer is IP instead of something else. The future of Internet TV is closer to Facebook and YouTube and Netflix than the standard grid video product that one gets today from cable, satellite, telco.
Internet TV is about catering to the Internet generation as much as it is about delivering video over IP. The social side of the Internet is evolving rapidly and we are evolving with it. As Internet TV becomes more personal, social and portable to all of one's screens, the old video grid will have less and less relevance to Internet-centric consumers. And the long-term outlook for Internet TV is very promising.
We are especially fortunate as Internet TV develops to have a thriving by-mail offering that gives us the financial strength to deliver strong earnings growth while also investing in the future. Internet TV on a global basis is an enormous opportunity and we're excited about being one of the early leaders in the space.
From Q&A:
First, what gives you confidence that a digital content acquisition model won't shift toward variable with usage and are you seeing higher renewal costs on any digital content that you've recently renewed?
Reed Hastings
Let's see. On the first, there's a mix of content that's available in the market and the types of licensing have been set by competitive frame. If it's content, then mostly it's sold to TV channels and then it's mostly sold on a flat rate basis. If it's content that's brand-new released it might be sold on a more pay-per-view basis. So it's not driven by us or by the Internet, it's driven by what the market is by the other buyers.
The second question was in terms of renewing deals, have prices gone up, and the answer is in some cases they have. We've got a bigger subscriber base and we're able to pay more. We look at that as a win-win. The point of our business is to be able to grow very large on streaming and to pay the studios a large percentage of that, which gets us more and more content. So that's natural. It would be unnatural if it didn't happen. And the only thing that we have to watch out for is that it doesn't grow in some faster way than our business or somehow negatively impact our gross margins, which we can see is not happening.
Can you provide some color on the contribution that streaming-related devices had on subscriber additions in the quarter?
Reed Hastings
Mark, it's hard to be precise on it, but we think it's definitely very positive having these Blu-ray devices that you turn on and you've got Netflix right on the home screen. In Q4 there's a big benefit from Xbox, upgrading to the installed base, and that continued to help us through into Q1. So the more devices, especially devices that have the Netflix logo on the home screen where you're a click away from streaming, the better. So it's definitely a very positive part of the ecosystem for us.
Having been a user of Netflix Watch Instantly, I'm thoroughly impressed with the service. What are the dynamics involved in adding titles to Watch Instantly?
Reed Hastings
It's mostly money. We just have to spend more money to get more content. So there are a couple of special cases, but mostly as we grow, as we get more usage, we're able to pay the studios more money and we are continuing to grow the content, as we have been over the last two years.
A quote I found interesting... basically where one out and two ou customers are actually more profitable than the more expensive plans:
So as long as the one out and the two out customers are profitable - and on a percentage basis they're more profitable than three out customers - then the presence of those subscribers increases enterprise value of Netflix.
Does the Xbox deal restrict you in some way to tie up with other game console manufacturers? If so, then how long does the exclusivity last?
Reed Hastings
It is exclusive for us currently and we're not commenting on the other terms, for example, how is that exclusive in effect for at this point.
This one is pretty huge. The major cost for streaming content is not in the delivery, but in the acquisition. It shows that arguments about bandwidth costs, etc being prohibitively high to be utterly bogus.
As streaming becomes a bigger component of [the mix] [inaudible] disadvantage relative to the larger players with [inaudible] and does [AC usage] change your answer to this question?
Reed Hastings
Would you say the question again?
Deborah T. Crawford
As streaming becomes a bigger component of the mix, [inaudible] and does [AC] usage change your answer to that question?
Reed Hastings
Most of us who are streaming are contracting with [inaudible] Akamai, Level 3 and others, and I presume the larger that you are, the better [inaudible] you can get, kind of normal commercial leverage. But I don't see that that's going to be a material difference because the cost of streaming is quite low relative to content, so content acquisition is where the difference is and the advantages of scale may or may not come in.
To recap, the business continued to perform strongly in Q1 and our outlook for the full year improved. The DVD by mail business continues to grow rapidly and we expect that trend to continue for the foreseeable future. At the same time, it's clear that instant streaming is energizing our growth.
I look forward to updating you on our continued progress in July.
http://seekingalpha.com/article/132974-netflix-inc-q1-2009-earnings-call-transcript?page=-1
As I say on each of these calls, our goal is to grow subscribers and earnings every year while expanding into streaming video. We continued to execute well against that goal in Q1 and Netflix in on track for a record year in 2009 on all dimensions.
In Q1 we grew subscribers from 9.4 to 10.3 million. The 920,000 net additions were the largest in our history and we're 20% higher than Q1 a year ago.
Net income grew to $22 million, up 68% from the prior year.
EPS grew to 37%, up 76% from a year ago.
While it's clear that instantly streaming movies and TV episodes to subscribers' laptops and TVs is energizing our growth, what is also happening is that our subscribers in total are renting more DVD and Blu-ray movies than ever. In fact, not only did our DVD shipments grow on a year-over-year basis but our year-over-year disk shipments grew more in Q1 than the prior year Q1. We believe Netflix DVD and Blu-ray rental will continue to grow for many years as video stores close and as consumers get increasingly comfortable with e-commerce and the Netflix unlimited rental offering.
Even the physical shipments will grow for many years. We are continuing to invest in our disk operations. For example, we recently moved our central operations distribution center, where we receive disks from the studios' replicators, from Sunnyvale, California to a lower-cost and larger space outside Columbus, Ohio.
Another investment example is that we've been working for the past few years on perfecting automated optical inspection for returned disks to more accurately determine which disks should be discarded, repaired or sent back out to another subscriber, and now we're finally beginning the nationwide rollout of that system. This automated inspection of returned disks will improve our subscriber experience and reduce the number of disks we scrap.
With the strong growth in Blu-ray we felt Q1 was the right time to put in place more realistic Blu-ray pricing. We landed on the 20% to 25% premium for high-definition Blu-ray, which is in line with the high-definition premium consumers pay in other channels but is less, unfortunately, than the price premium we currently pay to some studios for Blu-ray relative to DVD. If we can get our Blu-ray cost premium more in line with what consumers are willing to bear relative to DVD, then we can be much more aggressive in promoting Blu-ray adoption to our 10 million plus subscriber base. This is the critical time period for Blu-ray and we hope to be able to make more progress this year and play an even larger role in the success of Blu-ray.
The key takeaway here is that there is still a lot of growth in rental by mail. The studios clearly have a vested interest in extending the life of DVD and Blu-ray and that's good for Netflix as well. Our subscribers are drawn by our library of more than 100,000 titles with a user-friendly interface that helps our customers find TV shows and movies they will love. Bundling that offering with a growing selection of streaming content for one low subscription fee gives our subscribers a seamless way to expand their habits to include Internet delivery, and that gives us a significant competitive advantage as streaming gains traction.
Despite kiosk growth, however, we had a record quarter and we expect to have a record year because our differentiators continue to be our vast selection - over 100,000 titles - the convenience of mail and streaming, that you don't have to drive anywhere to receive or return a Netflix disk, and our unlimited rentals for one flat fee.
Turning to streaming, the overall consumer embrace of online video is growing rapidly. Between Netflix, MLB.com, Hulu, YouTube, Amazon, Apple and others, consumers are watching more and more online video and the quality of that video is improving. It's not hard to believe that online video will grow substantially every year for a very long time in the same way that cell phone minutes and browser usage have grown steadily over long periods of time. Laptops are getting cheaper and faster and smaller. Streaming to TV screens is also growing, as we and others are getting simple software clients built into a wide range of consumer electronic devices.
It's important for Netflix at this early stage be spending aggressively on streaming content in order to ensure we are well positioned as the industry evolves, but that means we are essentially buying many titles twice now. We buy a title once on DVD and Blu-ray and then we buy it again later for streaming, even though at that point we usually have many excess physical units of that title in our distribution centers. It's great for content owners and okay for Netflix since we save so much on postage and handling.
In Q1 we continued to make good progress on expanding our streaming content, recently adding, for example, the first nine seasons of the animated hit, South Park. We licensed both TV shows and movies from the networks and studios. Many of the movies are not able to be licensed directly from the studios because the studios have licensed the big movies exclusively to networks such as Starz.
Our belief is that since these networks have never missed an opportunity to expand distribution starting with cable, then adding satellite and then telco, all of which compete with each other, that the networks will look to grow their distribution via Internet retailers such as Netflix in the years to come. This will help grow those networks' revenues by reaching new audiences of Internet-centric customers and will contribute to the overall health of the channel distribution business, the benefit of which comes to the content creator in higher content fees.
We are looking to a day when we have plentiful movie and TV show content for streaming. By us carrying entire channels, like we do today with Starz Play, the online version of Starz, and by us licensing the content from the channels like we do now with NBC, CBS, The Disney Channel, Nickelodeon, Comedy Central, and others, we will simply be a fourth option for consumers and a fourth and growing revenue source for networks and studios.
Strong content also has the benefit of making our service more attractive to consumer electronics companies and we are buried with requests to embed our software in a wide range of devices. It will take us some time to get it all delivered, but it's possible that within a few years nearly all Internet-connected CE devices sold will include a Netflix streaming client.
When we think about the right amount to spend on streaming content each year, we consider the benefits of the CE deals because it helps us get those CE deals as well as the retention benefits from more viewing, the acquisition benefits of more subscribers, and the cost benefits of DVD shipment substitution. Given our momentum to date, we are continuing to push up our streaming spending, consistent with our earnings goals, which Barry will elaborate on.
It's easy focus on the Internet as an efficient technology for content delivery, but the broader aspect of the Internet is as a social medium, with a sense of community. The future of Internet television is not 1,000 linear channels where the transmission layer is IP instead of something else. The future of Internet TV is closer to Facebook and YouTube and Netflix than the standard grid video product that one gets today from cable, satellite, telco.
Internet TV is about catering to the Internet generation as much as it is about delivering video over IP. The social side of the Internet is evolving rapidly and we are evolving with it. As Internet TV becomes more personal, social and portable to all of one's screens, the old video grid will have less and less relevance to Internet-centric consumers. And the long-term outlook for Internet TV is very promising.
We are especially fortunate as Internet TV develops to have a thriving by-mail offering that gives us the financial strength to deliver strong earnings growth while also investing in the future. Internet TV on a global basis is an enormous opportunity and we're excited about being one of the early leaders in the space.
From Q&A:
First, what gives you confidence that a digital content acquisition model won't shift toward variable with usage and are you seeing higher renewal costs on any digital content that you've recently renewed?
Reed Hastings
Let's see. On the first, there's a mix of content that's available in the market and the types of licensing have been set by competitive frame. If it's content, then mostly it's sold to TV channels and then it's mostly sold on a flat rate basis. If it's content that's brand-new released it might be sold on a more pay-per-view basis. So it's not driven by us or by the Internet, it's driven by what the market is by the other buyers.
The second question was in terms of renewing deals, have prices gone up, and the answer is in some cases they have. We've got a bigger subscriber base and we're able to pay more. We look at that as a win-win. The point of our business is to be able to grow very large on streaming and to pay the studios a large percentage of that, which gets us more and more content. So that's natural. It would be unnatural if it didn't happen. And the only thing that we have to watch out for is that it doesn't grow in some faster way than our business or somehow negatively impact our gross margins, which we can see is not happening.
Can you provide some color on the contribution that streaming-related devices had on subscriber additions in the quarter?
Reed Hastings
Mark, it's hard to be precise on it, but we think it's definitely very positive having these Blu-ray devices that you turn on and you've got Netflix right on the home screen. In Q4 there's a big benefit from Xbox, upgrading to the installed base, and that continued to help us through into Q1. So the more devices, especially devices that have the Netflix logo on the home screen where you're a click away from streaming, the better. So it's definitely a very positive part of the ecosystem for us.
Having been a user of Netflix Watch Instantly, I'm thoroughly impressed with the service. What are the dynamics involved in adding titles to Watch Instantly?
Reed Hastings
It's mostly money. We just have to spend more money to get more content. So there are a couple of special cases, but mostly as we grow, as we get more usage, we're able to pay the studios more money and we are continuing to grow the content, as we have been over the last two years.
A quote I found interesting... basically where one out and two ou customers are actually more profitable than the more expensive plans:
So as long as the one out and the two out customers are profitable - and on a percentage basis they're more profitable than three out customers - then the presence of those subscribers increases enterprise value of Netflix.
Does the Xbox deal restrict you in some way to tie up with other game console manufacturers? If so, then how long does the exclusivity last?
Reed Hastings
It is exclusive for us currently and we're not commenting on the other terms, for example, how is that exclusive in effect for at this point.
This one is pretty huge. The major cost for streaming content is not in the delivery, but in the acquisition. It shows that arguments about bandwidth costs, etc being prohibitively high to be utterly bogus.
As streaming becomes a bigger component of [the mix] [inaudible] disadvantage relative to the larger players with [inaudible] and does [AC usage] change your answer to this question?
Reed Hastings
Would you say the question again?
Deborah T. Crawford
As streaming becomes a bigger component of the mix, [inaudible] and does [AC] usage change your answer to that question?
Reed Hastings
Most of us who are streaming are contracting with [inaudible] Akamai, Level 3 and others, and I presume the larger that you are, the better [inaudible] you can get, kind of normal commercial leverage. But I don't see that that's going to be a material difference because the cost of streaming is quite low relative to content, so content acquisition is where the difference is and the advantages of scale may or may not come in.
To recap, the business continued to perform strongly in Q1 and our outlook for the full year improved. The DVD by mail business continues to grow rapidly and we expect that trend to continue for the foreseeable future. At the same time, it's clear that instant streaming is energizing our growth.
I look forward to updating you on our continued progress in July.
http://seekingalpha.com/article/132974-netflix-inc-q1-2009-earnings-call-transcript?page=-1