Highlights From NFLX's Q3 (Q&A) Conference Call

Netflix, Inc. (NASDAQ: NFLX) reported Q3 EPS of $1.16, $0.22 better than the analyst estimate of $0.94. Revenue for the quarter came in at $822 million versus the consensus estimate of $810.53 million. Shares are bouncing around a 52-wk low, down over 35% today!

Highlights From NFLX's Q3 Conference Call:

• (Q&A) Similar to previous quarters, we've organized the questions by topic as we received them via e-mail this afternoon. We'll start with questions about the domestic business. Given the sub-losses in October why are you so confident that November will be flat and December will have positive net adds for streaming? What does the churn look like, week-to-week in October?
  (A) What we've seen is a second wave of cancellations from the price increase. The first wave was in July upon announcement and the second wave has been in September and October as people become more aware of the price increase and then either change the plan or cancel. And that wave has been declining very steadily over the past couple of weeks. And so we have substantially less weekly cancels now than we did just three or four weeks ago. So that's what gives us confidence that its - this wave passing through.
  
• Why do you specifically believe your December month domestic net adds will be strongly positive? Do you plan a major marketing campaign to help make this happen?
  (A) Our marketing has been very successful for the last several years. And we don't plan on any substantial change to it. It's a great set of campaigns that work very well at attracting streaming subscribers. And in Q4, particularly in December, there is more focus on a set of devices, video game consoles that get sold, iPads that get sold, a wide range of devices. And so our expectations are modeled from prior year's performance.
  
• Why not reintroduce a combined streaming/DVD plan offering at a discount for taking both?
  (A) Well, as we addressed in the letter, we think the future is brightest by focusing on streaming. We could in principle, offer a discount for hybrid, but if we were going to use discounting dollars, we wouldn't want to be trying to incent more DVD use in subsiding DVD we'd want to be discounting streaming and focus on getting even more market share. As it turns out, we think that $7.99 streaming is such a great price that mostly we should focus on continuing to sell out the content and so we are really quite comfortable in our growth with the two $7.99 programs.
  
• Do you need to ramp spending to win back sentiment to drive the virtuous cycle even if it means lower margins for the next 12 to 18 months? Has your programming spend targets for 2012 changed due to the change in subscriber trends, if so, what type of content are you giving out?
  (A)Well as we said in the letter, the focus for us is in building back our reputation and brand strength. But that's not through grand gestures, signing some crazy content deal or doing something else. It's the same set of steps that we've been using year after year for the past 10 years in terms of building our brand, which is a steady focus on execution, improving our service quarter after quarter. And in terms of our programming content, we do have built into our plan substantial increases in the content investment over this year and over the prior-year. And it's really exciting that we are able to fill out that content as we documented in its effect in our letter.
  
• Can you please provide apples to apple comparisons for your subscriber guidance? What does it imply on a unique subscriber basis and how many hybrid subscribers are you assuming for Q4?
  (A) This is David Wells the CFO. So in terms of our subscriber guidance what we said in the letter was we would be up slightly from the 23.8 million unique subscribers we ended Q3 with. So that tells you sort of where we are from a unique subscriber basis. I will say that from a hybrid subscriber basis, we expect streaming only subscribers to grow substantially, DVD only subscribers to be up somewhat, and for those subscribers taking both services to be down. And I think all the pieces are there in the letter and the guidance.
  
• Will churn peak in Q4?
  (A) Really, we focus on net adds and growing the business. And we make it very easy for customers to exit or cancel Netflix and then come back. So we really don't focus on churn, we focus on total growth with the business or net additions.(A)And I think if they were meaning to ask the question of, will the number of people leaving the service related to the price changes peak in Q4, Reed's already answered that question in terms of the weekly trends that we see in the retention rates.
  
• Could you provide more detail around your domestic streaming contribution margins? 8% seems unusually low given that you already have 21 million streaming subscribers and should therefore have significant scale. Is there a subscriber level at which you believe your streaming contribution margin will meet or exceed your DVD contribution margin?
  (A) Well, I think in the long run, the long-term margin structure for streaming will be ultimately determined by the competitive space, and how many competitors we have. In the short run, we've been aggressively adding streaming content at the same rate as subscriber growth. And we continue to anticipate investing in that in 2012. But we do have the confidence that we'll be able to grow in pace along with that rate of investment addition. So we think we'll be able to take up contribution margin at the same time.

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Netflix (NFLX) Reiterated at Market Perform by Citizens: 'Remains a Clear Leader'
• Twin Disc (TWIN) Tops Q4 EPS by 16c
• Advance Auto Parts (AAP) Tops Q2 EPS by 22c; lifrs profit guidance