Netflix finance chief Barry McCarthy took the stage at Jefferies’ annual Internet conference this morning.
Big point: The company jacked up its Q1 and full-year guidance this morning. Netflix expects to end the quarter with between 8.16 million and 8.26 million subscribers, up from its previous estimate of 7.85 million to 8.05 million. It expects Q1 sales to come in between $324 million and $328 million, at the higher end of its previous $323 million to $328 million range. And the company expects Q1 EPS to come in between 15 cents to 22 cents per diluted share, up a hair from its previous range of 13 cents to 21 cents per share. Why so much subscriber growth but so little revenue/EPS growth? McCarthy says it takes a little longer for that stuff to show up — free 2-week trial, etc.
Other key points: Not too worried about Blockbuster competition — they have to focus on fixing their stores first, not competing on the Web. Blu-ray discs cost more than DVDs, but NFLX will only raise prices if it has to. And Web streaming is growing nicely, but NFLX won’t disclose numbers. More announcements like the LG set-top-box deal coming soon — McCarthy had no comment on a rumoured “big” tie-up (Microsoft).
LIVE notes from Jefferies Conference:
8:44 As expected, guidance question first. Seems like raised sub number quite a bit, but only tweaked revenue and EPS. Why? The revenue growth will follow subscriber growth. This quarter’s sub growth will begin to show up 2 weeks after the free trial and the following month. Sub growth is coming from two shifts: Longer lifetime value, better retention on period-over-period basis, and acceleration in new subscriber additions. And we’re acquiring subs at a lower cost than we expected. Not many times in company’s history when firing on all cylinders, but Q1 is one of those times.
8:46 Why lower churn/longer lifetime of subs? Blockbuster pulled out, of course, but anything NFLX did? It’s hard to know. No question been a big shift in competitive landscape. (BBI changed pricing on unlimited store-based rental.) How much? Difficult to say. Big structural change in consumer value prop.? Nope. Consistent evolution to offering a better service. Most recent shift would be ‘watch now’ feature where we stream movies to subscribers as part of a bundled service offering.
8:48 How about pricing? Aggressively marketing cheaper plans? Not really. On par with spending, subscriber growth this quarter will be an all-time record for the business, which sort of reminds me to talk about investment in growth. Investing aggressively in growth. Could have done a better job in earnings call reminding people that price decrease was an aggressive investment in growth. Can invest in one or two ways: Increasing marketing investment, or to invest in consumer value prop., which we did by lowering price. Low relative price is contributing to faster than expected subscriber growth, and those subs are staying longer
8:51 How do you manage business vs. Blockbuster? How can you do long-term planning, not knowing what they’re going to do. Stock answer: Same strategy for five years. Bundling DVDs-by-mail with downloads.
8:50 Getting slightly bigger bang for our buck online because financial service companies spending less? Good organic growth.
8:53 Do you have insight into what Blockbuster might be doing? First spent tons of money, then none, then a trickle now. BBI has earnings call in March, might hear more about their strategy then. Guessing they’ll remain focused on returning stores to profitable growth.
8:54 What do you expect Blu-ray will do for NFLX? Studios are hoping that we’ll see rapid growth from consumer adoption of DVD players, will replace libraries with higher-cost Blu-ray discs. TBD for NFLX: Investors have two questions. Cost? Extension of DVD life cycle? On cost front, the content price is higher for new releases. DVD $18, Blu-ray $23. Remains to be seen how much price erosion takes place, but seems apparent content will cost us more. Today, HD content is a very, very, small, single digit percentage of overall customer ships. I hope it grows, but I expect it’s going to grow at the rate of 1300-1500 titles in current calendar year, 300 new release, 1000 back catalogue — BTW, we have 90,000 titles. Whether we adjust pricing or not in response to increased cost will be entirely a function of churn, SAC, and gross margin.
8:57 In many consumer segments, consumers pay a premium for HD content. That could signal price increase, but doesn’t mean we need to. If we can exploit interplay of SAC, churn, and gross margin, and give customers a better value because they stay longer, we will. Not to beat a dead horse: When we brought company public in 2002, opened distribution centres across the country. Everyone in NY got more DVDs, consumed more DVDs. Gross margin declined. On its face, business was less profitable. Except subs were happier, churn went down, people stayed longer, started to grow faster for less money. Started to grow faster for free. When dust settled, were more profitable, even though gross margin had declined. If we can, we will. If not, we’ll look to price for margin increase.
8:59 If to rebuild DVD library costs a lot of money, and if you’re a BBI, and looking to refocus self on the store, do you de-emphasise or re-emphasise online because of higher investment? Can BBI afford Blu-ray content? I think you’ve framed for them the over-arching strategic question. Can they afford the investment overall? 3 million subs, losing them in the past several quarters, business is treading water. If they don’t fix the store-based problem, they’re toast. Got a store-based guy. That’s a long way of saying I don’t know the answer to the question. Job 1 is store, and don’t know if they can afford both store- and online-based businesses.
9:02 No conclusive stats on closure of Hollywood video. 70% of what gets rented is back-catalogue content, hasn’t moved at all since 2002.
9:04 Redbox: Doesn’t have breadth of offering. Good deal, though. How big a threat? Redbox started by NFLX former Biz Dev VP, proud of his accomplishment. Wasn’t clear that biz model would be viable. May create some opportunities for us from incremental growth. Very price competitive, primarily focused on new release. A real competitive threat for stores. To extent that that pressures stores, available market for online sub rental will grow faster.
9:05 Are you interested in kiosks? No, not announcing acquisition today!
9:06 Post office seems to have habit of raising prices every year it seems. You guys have been able to kind of absorb it. Is there a point when you have to start passing it on to consumer? With amount of volume, it is a big number. How do you manage that? “Carefully.” Have absorbed five postal rate increases and have reduced average prices by 15%, still able to deliver 20%+ net income growth. So far, done it by extracting more value from subs over their life, primarily with better retention and lower SAC and marketing as % of revenue. Able to stomach investment in content for online streaming, but if we run out of runway, then we’ll have to look at pricing to meet overall profit objectives and sustain growth in internet delivery biz. Not imminent. Have included another postal rate increase into guidance, and expect more over time.
9:08 Redbox model: If you’re a store, do you lower pricing on new releases vs. catalogue? Convenience? We don’t respond competitively to stores. Will continue to play our game. Stay focused on winning customers for delivery of Internet movies. Not competition with store based businesses per se.
9:10 What about convenience versus value? In 1999 we were an a-la-carte service. We were going out of business. Then we reinvented service as subcription service. Belief that value trumps selection. Subscription always wins in competition with a la carte. The power of unlimited rental is a powerful call to action to consumers. Power of that is greater than convenience. On Internet world, that’s different — everything available all the time. Today, compete with store-based stuff with overarching value prop.
9:13 LG deal for set top boxes: Any other manufacturers? Sub growth because of macroeconomic environment? Very pleased to have been able to make the LG announcement. First of what we hope will be many. Overarching strategy is to become like Dolby Digital, a feature that comes with devices you buy primarily to do other things. If we succeed, will be available to a large number of consumers. It will take a long time for lots of consumers to allow digital downloads to TV set. So. Two important conditions predicate: One is need to be lots of devices in consumers’ homes that allow you to get content onto TV set. Mobile devices interesting but not core of the market. Then needs to be enough good content that compels people to want to access that content online. You need both. Expect more announcement. One big announcement has been rumoured, of course I have no comment on that. A couple won’t me enough. We need many.
9:15 Nothing interesting to share about subs. New subs using streaming stuff more than old subs. Nothing unusual this quarter. Big surprise is much stronger organic growth which is driving SAC number. More inventory available online.
9:16 We’re not disclosing much about the service for competitive reasons. Growing very rapidly and we’re enormously pleased. Compete.com has released some stats on usage stats, has showed we’re largest competitor in the space, image that’s going to continue for some time.
9:17 Downloads: So far you’ve been eating cost of downloads. Is there an advertising opportunity here? Not too many thrilled with pre-loads, Google testing some “really interesting formats” (Really?). If someone could engineer an ad-supported model for feature films, but let’s think about economics. iTunes movie costs $4. Selling display ads $20 CPM. To fund cost of $4, need to sell about 200 ads in that movie. Even for 50% gross margin, you’d need to sell 100 ads. Could you as adjunct, offer advertising? Exceeded performance milestores, but set up interesting dilemma. We want people to focus on Web site, not be distracted by display ads. We’d be in business of offering a not very good display advertising model. Decided to exit that business. Don’t expect it to become a new economic revenue stream.
9:20 Q&A finished.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.