Netflix (NFLX) beat the Street consensus on revenue and EPS, but Q4 subscriber growth slowed at the movie rental service. The company reported $302.4 million in revenue, up 9% y/y and narrowly beating the Street’s $301.7 consensus. EPS came in at 24 cents, beating the Street’s 14 cents per share estimate.
But subscriber growth slowed year-over-year: Q4 net subscriber additions fell 31% from 654,000 during 4Q06 to 451,000 during 4Q07. Churn, the percentage of customers who leave the service each month, ticked up from 3.9% to 4.1%. Netflix finished 2007 with 7.48 million subscribers, representing 18% y/y growth. Release
Recent NFLX coverage:
Pali On Netflix: Sell “On Any Strength”
How Will Apple’s Movie Rentals Stack Up Against The Competition?
Comcast: Dump Fancast, Buy Netflix
Five Questions About LG’s Netflix Movie Devices
Netflix-LG Movie Deal: Picking Winners And Losers
Live conference call notes:
4:57 Soothing music.
5:00 Call begins. IR VP joins the call for forward-looking boilerplate.
5:02 Our goals at Netflix are simple: Build a cool service, and grow EPS! EPS growth up 37% y/y. Guiding to 22% increase over 2007.
5:03 Increased competition from Blockbuster led to lower net adds. Look what that got them! Expecting more NFLX net adds in 2008 than 2007. This year’s improvements include unlimited streaming, 24×7 customer support, more shipping points (Montana!) and more Web merchandising.
5:05 Kiosk-based RedBox is a double edged sword. On negative side, $1 per day rentals are a great value. On positive side, hits video stores more than NFLX. If causes more video store closures, could prove net benefit to NFLX.
5:06 Don’t see cable VoD, etc., as short-term competitors. Going through limited terms, pricing, etc. Only diff betw. Internet and cable VoD is laptop portability vs. TV connectivity. Otherwise very similar. DVD’s advantages: ubiquity of content & dvd players, earlier window for releases, lower prices.
5:08 Appears Blu-ray has advantage in format war. Consumer adoption will increase. Look out for players falling below $200, and Universal and Paramount adopting Blu-ray. Would be a positive for studios and NFLX, fueling “another decade” of “robust, robust” disc-based entertainment.
5:09 Investing in nascent Internet video delivery market, but not impacting EPS much. Tripled from 2k to 6k movies/TV shows.
5:10 Over the years, have developed confidence making unlimited subscriptions work economically. Service costs need to be balanced on other metrics. Today, Netflix has streamed to Windows PCs only. Happy w/ viewing of subs, particularly younger subs. We hope in ’08 to support Web-based viewing on Mac. Holdback has been lack of DRM solution on Mac. We will work to expand streaming to hi-def DVD consoles, set-top boxes, game consoles, etc. LG partnership.
5:12 As we grow a larger DVD rental sub base, ability to offer both online/DVD rentals means an advantage over standalone services, at least while DVDs are important over the next 10 years.
5:14 Going through Q4 numbers, guidance in release. For third year in a row, CES buzzing with news of Internet video delivery. In the intervening years, from Dec. 2005 to 2007, sub base has grown by 79%. Revenue has grown by 77%. Nearly doubled free cash flow.
5:16 It will be a while before Internet based downloads reach mainstream. As long as quality and quantity of content is limited, services won’t take off. Why? Studios protecting current revenue stream. Are protecting DVDs, which make up 41% of their revenue. Also many movies licensed to pay networks like HBO, etc. Before and during pay window, that content is essentially off the market. The longer it takes, the bigger our brand, and the better our odds.
5:18 Going through more Q4 stats.
5:19 Lowest customer acquisition cost in 4 years. 2008 guidance 8.4 – 8.9 million subs. Much will be front- and back-end loaded in Q1 and Q4, reflecting historical growth patterns. Expect to end Q1 w/ 7.85 million to 8.05 million subs.
5:21 Guidance factors in 1 cent postal increase; 2 cents for 2-way shipments.
5:23 Q&A begins.
5:23 Guidance implies accel. in gross adds or decrease in churn. Why that confidence? Is sub mix changing in various plans? Reed: Growth over prior years mostly in gross add improvement. Made it easier to put self on vacation hold, which consider a cancel. Inflates gross adds, churn higher. Most of growth will be from increased gross adds. Haven’t historically provided any specifics on mix between plans other than ARPU. No predicted change in mix from Q4 vs. Q3 — steady sailing. Big change we saw in last couple of days in Q4 was competitive shift in pricing and change in momentum that resulted.
5:26 Where are gross adds coming from? Rental totals are steady, online is taking from stores. Essentially, all of our growth comes out of video stores.
5:27 Why didn’t you spend more to grow faster? Decided lower marketing spend + price decrease was the right strategic path. Expect to continue down that path for the foreseeable future.
5:28 Any changes in usage levels or churn rate w/ Web-based viewers? Reed: Amongst active users of streaming, skew young. They have different churn/usage profiles, so don’t have a good control group. Does appear that the more someone uses streaming, esp. with unlimited, they will consume less DVDs. But don’t know the degree yet.
5:30 Seen any change in growth since BBI increased prices? Modest improvement in acquisition, but not yet any real change in people saying they’re going to Blockbuster Online. Too soon to write them off — they’re still active in the market.
5:32 Cost more to give people movies online than on DVD? Non-answer. Writers strike helping? Not sure — no material help/hurt.
5:37 If we look at 2009/2010, is there a point where you won’t be able to offer unlimited streaming? We think very much about it — trying to line up consumer proposition. Usage of online streaming while confirmed to PCs is still very broad. I don’t see anything that would disturb that unlimited viewing ability.
5:38 LG relationship: When can we accept more devices beyond LG? 2008? 2009? Why popular with CE? If we do a great job with LG and they sell a lot of their devices and make a lot of money, then others will want part of that success. How successful can we make LG in terms of growing their share? We may see a few more agreements this year. Expand more broadly in 2009.
5:39 Any metrics for streaming service? Unlimited watching makes economic sense, increased attractiveness to consumer greater than increased cost, but no other metrics.
5:40 Expect absolute marketing dollars to be down in ’08.
5:42 Any metrics on overall usage of HD discs? Why not accelerate to add more subs now before Apple gets better? Remember, this year $1.3 billion in VoD spending that we’ve been competing against. Even if Apple still goes up 10x, still “background noise” in VoD market. Don’t see any material shift in climate, so we don’t look at it and say “the climate’s going to get harder in the future.” Blu-ray sharp growth since CES. Winds are shifting to Blu-ray but nothing is done yet. Meaningful percentage of subs renting HD content, but not yet a meaningful percentage of shipments — not enough content yet.
5:45 Why Q1 ARPU up? We don’t guide ARPU, but will give colour: New sub growth back-end loaded in Q4, become subs early in Q1. New sub growth in Q1 become revenue-gen subs early. Tends to move revenue different than in rest of year. In long term, expect ARPU to move down as sub mix normalized, but may see seasonal fluctuation due to revenue months per sub. BBI probably went down modestly but don’t have any specific information.
5:49 If Blu-ray takes off, those discs cost more, could have an effect in terms of content costs. But customers know that every other HD option costs more. Will know more later in the year about HD-specific pricing.
5:51 How long will HBO/Showtime etc. own exclusive contracts to movies? Will see how shakes out over next few years. Perhaps by 2010.
5:52 Rationale for unlimited streaming plan: Because subs were hitting against time limits? No, primary was to simplify the proposition.
5:54 Q&A over. Reed says over & out.
Business Insider Emails & Alerts
Site highlights each day to your inbox.