Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Netflix, Inc. (NASDAQ:NFLX)

Q3 2007 Earnings Call

October 22, 2007 5:00 pm ET

Executives

Deborah Crawford - Vice President, Investor Relations

Reed Hastings - Chairman of the Board, President, Chief Executive Officer

Barry McCarthy - Chief Financial Officer, Secretary

Analysts

Gordon Hodge - Thomas Weisel Partners

Jim Friedland - Cowen and Company

Youssef Squali - Jeffries & Company

Douglas Anmuth - Lehman Brothers

Barton Crockett - J.P. Morgan

Tony Wible - Citigroup

Brian Pitz - Bank of America

Heath Terry - Credit Suisse

Operator

Good day, everyone and welcome to the Netflix third quarter 2007 earnings conference call. Today’s all is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Deborah Crawford, Vice President of Investor Relations. Please go ahead, Madam.

Deborah Crawford

Thank you and good afternoon. Welcome to Netflix's third quarter 2007 earnings call. Before turning the call over to Reed Hastings, the company’s co-founder and CEO, I will dispense with the customary cautionary language and comment about the webcast for this earnings call.

We released earnings for the third quarter at approximately 1:05 p.m. Pacific Time. The earnings release, which includes a reconciliation of all non-GAAP financial measures to GAAP and this conference call are available at the company’s investor relations website at www.netflix.com. A rebroadcast of this call will be available at the Netflix website after 3:30 p.m. Pacific Time today.

We will make forward-looking statements during this call regarding the company’s future performance. Actual results may differ materially from these statements due to 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 28, 2007.

Now I would like to turn over the call to Reed.

Reed Hastings

Thank you, Deborah and welcome, everyone. As you read today, our results in Q3 were very strong in comparison to expectations and we substantially exceeded our guidance in subscribers, revenue, and earnings. In addition, we raised our guidance for Q4 as described in our press release. In short, it was a great quarter.

As you know, in recent quarters our growth has been impacted by Blockbuster’s online strategy of selling dollars for $0.85. That’s not a viable long-term strategy and our competitor now appears to have de-emphasized their online business in favor of generating profits and focusing on improving their stores.

While our results in Q3 were significantly above our expectations, we are mindful that they were about the same as Q3 one year ago. Earnings, gross additions and churn were on par with last year’s Q3, while net additions were about 40% less than last year, since we were churning from a bigger base this Q3.

We are much happier today than 90 days ago, but we’re still not where we would like to be in terms of subscriber growth. However, I am pleased that in the first three quarters of this year, we have already generated more net income than in the whole of 2006.

Internally, we debate how our business would have performed in Q3 without our June and July price cuts, and there’s no consensus. What is clear, however, is that even after the price cuts, we are an Internet retailer with over 30% gross margins and growing profits. Compared to other Internet retailers, our new pricing is still quite healthy in terms of gross margins.

The advantage of lower prices to our business is reduced churn and lower SAC. Our Q3 churn reduction was as our price cut models predicted, and most of it was due to our lower prices rather than the change in competitive climate. The reduction in SAC, however, we think was from a mix of lower prices, more efficient spend, and our competitor’s lighter marketing.

As we look ahead, we are focused on continuing to deepen the competitive moats around our DVD rental offering. By continuing to improve our service and being aggressive on value, we are confident at remaining the leader in online DVD rental, regardless of what the competitive landscape holds, and to be the primary beneficiary as more and more consumers move their spending and time online.

In addition of prospering in online DVD rental, we are expanding in online video quite nicely. In the past, we have announced various milestones, such as reaching 10 million views, in our desire to provide you with some sense of how subscribers were reacting to the option of watching content instantly on their PCs.

As the number of viewers and views continues to grow, this information becomes more sensitive for competitive reasons and going forward, we will no longer release it.

At a high level, our strategy is to build a very large DVD rental subscriber base and to bundle in the ability to watch those movies online. If a consumer in America is in to the Internet and movies, the chances are good they are going to be a Netflix DVD rental subscriber.

Additionally, since a good deal of content will be available only on DVD for some years, a hybrid offering like ours is differentially compelling to consumers in comparison with any online only offering.

Our goals in online video over the coming years are three-fold: one, to expand the content we offer online; two, to make it inexpensive and easy for consumers to view that content on the television; and three, to understand what the financial model for the hybrid service will be in the long-term.

On the content side, we are working steadily year after year to increase the amount of movies and TV shows we have available online. It took 10 years to get most content available on DVD and it may take that long again to get most content online.

We are pleased with our progress to date and are licensing more content every quarter.

In terms of enabling the viewing of online content on the television screen, we are exploring a variety of options, including Internet connected, high definition DVD players, Internet connected game consoles, and dedicated Internet set tops, with a variety of partners, trying to understand the best ways to provide inexpensive viewing of online content on the television.

In the meantime, laptop computers are, for the younger generation, one of the primary ways video of all sorts is being enjoyed, and our online viewing is up dramatically quarter over quarter.

While we are not yet in the position to provide investors the long-term financial model behind the hybrid service, we do want to reassure you that we plan no large-scale changes to our cash flows next year with, say, big hardware subsidies.

Ten years ago, we formed Netflix and eight years ago, we launched our subscription service. Our ambition has always been to emerge as one of the world’s leading Internet movie firms, with a profit stream that will significantly exceed that of our initial DVD business.

It took several years for us to turn our DVD rental business profitable and our online video expansion may take just as long. We now have more resources, bigger competitors, and a much bigger prize to earn.

Since the opportunity for online video, however, will emerge slowly rather than suddenly, we believe we can generate increasing profits for the business as a whole while we expand into online video.

To close, I want to thank everyone who continued to see the value in owning Netflix over the last nine months. The competition was more aggressive than we had imagined likely. I am proud that we chose to stick to the basics by steadily improving value and service quality for our subscribers, and we emerged stronger than ever.

It’s reasonable to expect that our stock price could continue to experience swings but we will continue as we have been to focus on steadily building a company whose competitive strengths position us to grow subscribers and profits year after year.

And now, over to Barry.

Barry McCarthy

Thanks, Reed, and good afternoon, everyone. As you know from today’s earnings release and Reed’s comments, Q3 results exceeded our expectations. Three weeks into the fourth quarter, we remain encouraged by our results quarter to date, which is reflected in our upward revision in Q4 guidance for subscribers, revenue, net income, and EPS.

Changes in the competitive environment were an important catalyst for the quarter’s performance, so I’ll begin my remarks by talking about the implications of competition for subscriber growth. Next I’ll discuss our third quarter results, our updated guidance for Q4, and provide a few comment on 2008. Then I’ll close my remarks with an update on the status of the stock buy-back program we announced on the Q1 earnings call.

Last quarter, I said we expected to operate in a challenging and competitive environment for the remainder of 2007 and into 2008. Ninety days later, we see a different picture. The question is how could things have changed so quickly? Two factors contributed to this shift.

First, as we discussed on last quarter’s call, we stepped up our investment in growth by lowering prices in order to increase our share of new subscribers and reaccelerate our sub growth; and second, Blockbuster’s new management team shifted strategy to emphasize profit in additional to same-store sales growth, a significant change in direction from the prior management team.

These two changes, and to a lesser degree, the effects of the seasonally strong quarter, restored our sub growth and lifted our ending subscribers above the high end of our guidance.

Financial results for Q3 exceeded our expectations across all key financial metrics. The highlights I’ll focus on today include revenue, gross margin, subscriber acquisition costs, and free cash flow.

Revenues were above the high end of the guidance, fueled by subscriber growth and retention improvements. ARPU declined again this quarter by about 4% sequentially and 10% on a year-over-year basis, which was in line with our expectations following the price cut last quarter.

In spite of the price cut, we earned the same revenue per paid disk shipment in Q3 as we did one year ago, which shows that the economics of lower price plans are working.

Gross margin of 33.9% outperformed our expectations for the quarter. Lower content cost was the primary driver of this out-performance, along with some benefit from lower fulfillment costs.

Although margins exceeded our expectations in the quarter, they were still down sequentially and year over year, as expected. Increased spending on Internet delivered video content and the price cut were the primary contributors to the sequential decline in gross margin. This trend will continue in Q4 as the full impact of lower prices cycles through the P&L and we continue to invest in Internet delivered video content.

In my opening remarks, I pointed to the changed competitive environment and the reacceleration of our subscriber growth. Faster subscriber growth in Q3 was accompanied by significantly lower marketing spending, which was a managed outcome. Subscriber acquisition cost of $37.91 was the lowest it’s been in eight quarters, and total marketing expense decreased by $10.2 million, or 17% on a year-over-year basis.

Last quarter, we committed ourselves to funding most of the cost of the price decrease with reductions in marketing spending, and this quarter you saw that strategy at work in lower subscriber acquisition cost.

My final comment on our financial performance for the quarter will relate to free cash flow of $36 million, which increased from $6.5 million in Q2, continuing a trend that emerged last quarter and a seasonal pattern that dates back to our days as a private company. This increase was driven primarily by a seasonal decrease in content acquisition and an increase in our accounts payable.

I began my remarks today by commenting on our raised guidance for Q4 -- fast subscriber growth, driven by our Q3 price cuts, as well as changes in the competitive climate explains our expectations for faster growth.

At the same time, the lower marketing spending associated with the price cuts should contribute to increased profitability.

Given our out-performance in Q3, and our increased guidance for Q4, I would like to comment briefly on our expectations for 2008 profitability.

Last quarter, I said we may see a decline in 2008 net income on a year-over-year basis. Given our third quarter performance, that view now seems overly pessimistic. Today, it wouldn’t surprise me to see net income flat to slightly up in 2008 on a year-over-year basis. Let me explain why I think that’s plausible.

Two important assumptions that underlay our expectations for 2008: first, we expect the current competitive environment to remain unchanged; and second, we expect to significantly increase our investment spending in Internet delivered video.

As Reed mentioned last quarter, we expect to debut Internet delivery to the TV next year, and that will involve increased investment in content as we expand our library of titles and more Netflix subscribers choose Internet delivery.

Before closing, I would like to update you on the status of the stock buy-back program we announced six months ago.

Last quarter, we purchased 2.1 million shares at an average cost of $17.17 per share. Since inception, we’ve purchased 3.4 million shares at a total cost of approximately $65.7 million. Whether we continue to buy shares back in the current quarter depends on where the stock trades during the quarter.

In summary, last quarter’s price cut, which was funded in part by a reduction in marketing spending and a favorable shift in the competitive environment, led the strong out-performance across all key metrics in the third quarter.

We believe the overall category of online DVD rental will continue growing. Our business model continues to perform well. We are pleased with our Internet delivered video progress and believe our hybrid distribution strategy by mail and across the Internet gives us a long-term sustainable competitive advantage.

We remain focused on accomplishing the strategic initiatives Reed outline in his remarks today and we look forward to updating you again in January on our Q4 call.

That concludes my prepared remarks. Thank you for joining us today, and now we look forward to answering your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Gordon Hodge with Thomas Weisel.

Gordon Hodge - Thomas Weisel Partners

Thanks. Terrific quarter. Just a couple of questions; it sounds like again the gross margin, very strong. I’m just curious if you could go a little bit more into it. I think your capital expenditures on disks was also at least below our expectations. Is the source of that primarily usage or are you getting meaningful terms on disks that are fully amortized, and/or are you seeing any change in the mix, either rev share, towards rev share discs or alternatively catalog versus new releases? Thanks.

Barry McCarthy

Well, as I said in my comments, Gordon, seasonally we see a decline in Q3 purchasing, and that explains the reason for the decline that we reported.

Gordon Hodge - Thomas Weisel Partners

Is that a seasonal decline in the need to purchase or is that just something to do with the calendar as it relates to the studios?

Barry McCarthy

Studios, primarily, studio release.

Gordon Hodge - Thomas Weisel Partners

Got it. And then just anything on catalog versus new release and rev share versus purchased?

Barry McCarthy

Nothing new in the quarter related to catalog versus new release, and as it relates to rev share versus purchase, over the last several quarters, we’ve leaned slightly more towards purchase than rev share.

Gordon Hodge - Thomas Weisel Partners

Okay, terrific, and then any comment as to what you think the impact of Movie Gallery’s bankruptcy filing might do for you?

Reed Hastings

Any time video stores close, it’s got to help us. You have to imagine, though, that the first thousand or so Movie Gallery stores that close are the ones that are right across the street from a Blockbuster, and so it’s probably reasonable to think that they are more likely to cross the street than suddenly come online.

If there’s ever isolated, rural stores that close, then the only option is online, so that would be a -- if there’s a second wave, that would be more helpful to us. I think the first wave is going to be mostly helpful to other video stores in the neighborhood.

Gordon Hodge - Thomas Weisel Partners

Thank you.

Operator

We’ll take our next question from Jim Friedland with Cowen and Company.

Jim Friedland - Cowen and Company

Thanks. Some questions on the P&L. Sequentially, looking at the tech and dev spending, G&A, and also PP&E, you are sequentially down Q-over-Q. And I just wanted to get an idea of some of the drivers, and the question behind that is in terms of the ramp of the Watch Instantly feature, are some of the expenses already preloaded, so as we go into next year, the need to increase, for example, tech and dev or PP&E is not as great? Thanks.

Barry McCarthy

In the tech and dev line, Jim, last quarter we capitalized, we expensed -- we took some one-time expenses that were non-recurring, so that explains the sequential decline.

The G&A line, which also declined sequentially, probably driven by litigation expense, also non-recurring.

Jim Friedland - Cowen and Company

And PP&E, which has declined for the last couple of quarters?

Barry McCarthy

It fluctuates seasonally. We tend to, to the extent we are going to by CapEx, it tends to be a year-end phenomenon for us, when vendors are anxious to cut deals to make sales quotas.

Jim Friedland - Cowen and Company

Okay, and the last part of that question is thinking about the necessary expenses for Watch Instantly, as you look at game players, DVRs, et cetera. Is there any need to accelerate the tech and dev spending in terms of a percentage of revenue going into ’08, should there be any meaningful change there?

Reed Hastings

We’ll continue to grow our investment on an absolute basis. We’re reasonably consistent with our history over the last couple of years, so there is no big change in that history. And some of that is deployed against instant watching, some of that’s deployed against making the core DVD rental service better.

Jim Friedland - Cowen and Company

Okay, great. Thanks a lot.

Operator

We’ll take our next question from Youssef Squali with Jeffries.

Youssef Squali - Jeffries & Company

Thank you very much. Reed, some time back you had talked about reaching 20 million subs by 2010, I think 2012. The competitive landscape kind of toughened up a little bit, so your focus -- are you focused a little less on that and more on bottom line? The competitive landscape seems to have improved quite dramatically in the last three months. Can you kind of just tell us where you stand directionally? I mean, between or a choice between potentially raising prices and try to maximize profits versus just keeping prices down and just dramatically increase subscriber growth to maybe going back to the initial philosophy? Can you just update us on that and is a price increase potentially on the table, considering how favorable the competitive landscape is?

Reed Hastings

Youssef, it’s a balance for us of both growth in subscribers on DVD rental, earnings, and our investments in online video. And so if we do our job well, we’ll be able to pull off increases in all three of those. So we’ve never looked at it as, for example, the 20 million, that it was 20 million at any cost. It was 20 million consistent with some very nice earnings growth along the way.

In terms of the 20 million, it will probably take us a couple of quarters to get a feel for what’s the likely trajectory going forward.

In terms of a price increase, it could always happen. So could price cuts. We continue to actually test more price cuts and looking for the elasticity in the same way that we always have, so prices and value is an effective tool for us to use on both side of that.

Youssef Squali - Jeffries & Company

You’ve invested a lot in customer care. You seem to be seeing that as a strategic advantage. Any way to quantify the benefit in churn from that move? And what other side benefits do you realize from having that asset?

Reed Hastings

There’s no precise way of qualifying it in terms of churn because we don’t have a controlled set of customers that didn’t get the high quality customer support, so it’s more our judgment that this is a worthy investment and it pays itself off in a positive brand reputation, which helps the word of mouth and helps us grow.

I would point out, I mean, we’re getting some great press about it. It’s not particularly material in the total P&L, so it’s a good thing but if you calculate the cost of 200 or 300 hourly employees, it’s not a big investment or a big driver of our P&L.

Youssef Squali - Jeffries & Company

Okay. That’s helpful. Thanks a lot.

Operator

We’ll take our next question from Douglas Anmuth with Lehman Brothers.

Douglas Anmuth - Lehman Brothers

Thank you. Barry, you were talking about SAC and noting how it was the lowest it has been in about two years. Can you provide some color on how the marketing spend trended throughout the quarter? I’m sort of wondering why maybe you didn’t even spend more in marketing to take advantage of the more favorable environment, at least during the back half of 3Q?

And then secondly, can you also talk about the composition of new adds and how that may differ from where it was a year ago, for example, in terms of whether you think these are new customers coming online or whether they are more so coming from a competitor? Thank you.

Barry McCarthy

As it relates to the trend during the quarter, no comment. As it relates to the composition versus a year ago, I think all we’ll say is that the trend in growth in rejoins continues. We’ve seen a gradual increase over time and that remains true today. We are seeing fewer folks leave for other online services, but it is not a hugely significant shift.

And as it relates to why we didn’t spend more in the quarter on marketing, I would remind you that last quarter our message was there are lots of different ways to invest in growth. One way is through additional marketing. Another means is with price reductions, and last quarter we made the decision to throw our weight behind price reductions and we submitted at the time that we would pay for it -- significantly pay for it with reductions in marketing spending, so nothing we saw during the quarter convinced us that we should depart from the strategy that we had articulated for you on last quarter’s call.

Douglas Anmuth - Lehman Brothers

And can you also comment on your Bay area penetration?

Barry McCarthy

Sixteen-point-nine percent.

Douglas Anmuth - Lehman Brothers

Thank you.

Operator

We’ll take our next question from Barton Crockett with J.P. Morgan.

Barton Crockett - J.P. Morgan

Great. Thanks a lot. Congratulations on a great quarter. I wanted to ask you a question about the gross addition trend though, which was down 1% year to year here, and the net additions down 50%. If you trend that out for a couple of years, that puts you at a point where basically you are not growing subscribers a couple of years out. Clearly I don’t think you guys see that, so I’m just wondering what keeps the long-term trend in subscriber growth going? Do you think you pick up gross additions over the next couple of years, or does the churn rate improve?

Reed Hastings

A little bit of both. We’re seeing, if you map out how do you grow to our goals over the next couple of years, it will require both reduction in churn and an increase in the gross adds, so it’s why we pointed out that in fact, although we’d significantly exceeded where we thought we’d be for Q3 on a year-over-year basis, we’re only half recovered where we were one year ago and we’ve still got some work to do.

Barton Crockett - J.P. Morgan

And then the other thing in terms of the investment in online, you guys have talked about a $40 million spend this year and I just want to be clear; in the past, you’ve suggested that you would spend more than that next year. Is that still what you are suggesting? And if so, if you could give us some sense of what that spend gets you?

Barry McCarthy

We did say that we expect to increase our spending next year. That’s all we’ve said. We said we would talk more about our online strategy and plans in January on the Q4 call, so if you’ll be patient, we’ll have more to say then.

Barton Crockett - J.P. Morgan

Okay, all right, but again, the flat to slightly up earnings includes more spend on online next year?

Barry McCarthy

Yes, that’s correct, and you could get your model to work with that increasing -- without increasing your assumption for online spending.

Barton Crockett - J.P. Morgan

Okay, and then the final thing, you may not be willing to go this far, but is the increase in online spending, is that of a recurring nature or is that just kind of a one-time thing that hurts you in ’08 but isn’t likely to be there in subsequent years?

Reed Hastings

There’s very little of our online spending that’s one-time in nature. You can always call something one-time but it almost always turns into, you know, as you’re growing and you’ve got new competitors in the future, to be essentially an ongoing investment. So said differently, we’re planning for success.

Barton Crockett - J.P. Morgan

Okay. All right, good. Thanks a lot, guys, I appreciate it.

Operator

We’ll go next to Tony Wible with Citigroup.

Tony Wible - Citigroup

Good afternoon. I had a couple of questions on the SAC and Barry, if you could, how would you anticipate the SAC changing with seasonality? And then also, if we were to see a revamped marketing push by Blockbuster, is there a way of kind of quantifying tit for tat how that would affect the earnings model?

Barry McCarthy

Well, it’s very hard to answer the second question in the abstract. One of the big drivers of SAC is growth from word of mouth, people who have heard about the service from friends and decide that you are the place they want to -- you are the brand they want to associate with and they walk in the door essentially for free. And [that’s notwithstanding] your, your average cost per acquired sub.

In terms of overall spending, SAC is very much a managed outcome and we begin each quarter with a fixed dollar amount in mind and Leslie and her team manage the business to deliver that level of spending. We will periodically reassess during the quarter, reassess the amount of money that we plan to spend with respect to our forecasts for profitability during the quarter. But given that we are still in the process of paying for the price cuts that we implemented, it’s not likely we’re going to double down on marketing spending.

Tony Wible - Citigroup

Given that the cuts that you’ve made have really kind of netted into a benefit based on your results this quarter, would you not consider just lowering pricing then on a go-forward basis?

Reed Hastings

As I said earlier on the call, we are definitely testing additional, price [tests] and lower prices to see is there enough elasticity such that with reduced marketing, we end up with greater profits and greater subscribers after the price cut, so it’s something we look at and potentially price increases also, depending again on the same elasticity. So we look at both.

Tony Wible - Citigroup

Reed, I appreciated your comments on the call about the potential for one of the channels to get to the TV being a box, but that you would not carry subsidies on that box. Could you elaborate a little bit more on what you meant by that? Are we talking about partnering with a third party or -- how would that box work relative to the other models?

Reed Hastings

We’ll fill you in more I think on our next quarter’s call. The main thing I wanted to get across is that we weren’t contemplating any radical moves on a cash flow, kind of put that one to rest, and that still gives us a lot of flexibility in how to operate and how to be effective, and we’ll be able to give you a fuller update a quarter from now.

Tony Wible - Citigroup

Great. Thank you.

Operator

We’ll take our next question from Brian Pitz with Bank of America.

Brian Pitz - Bank of America

Thanks. You mentioned the increase in investment spending in Internet video next year. Just to be more specific in terms of content, can you give us a sense between longer tail content projects versus not-so-long tail, and really comment on the competition that may result from other studios potentially chasing the longer tail content?

And then, on the second question, sort of a follow-up from another question that was asked, can you really give us a sense for how much may have been spent year-to-date on the Internet video project, so we just can model things thoughtfully going forward? Thanks.

Barry McCarthy

I understand why you re asking and I don’t mean to be difficult in saying we have no comment at this time, but we have no further comment at this time and we will -- to the extent we have more to say, we’ll say it on the Q4 call in January.

Brian Pitz - Bank of America

Great. Thanks.

Operator

We’ll take our next question from Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Thank you. I was wondering if you could give us an update on what kind of penetration you are seeing for the Watch Now service, and to what extent you’ve been able to meet your goals in terms of expanding the availability of the product offering there?

Reed Hastings

We’ve been very pleased with the Watch Now service. We announced, of course, 10 million views as of six weeks ago, so we’ve seen very nice and broad usage. And there’s a whole demographic of people that are very comfortable watching movies, whether those are DVDs or online video, on their laptop. So there’s a high-end base, which has the plasma TV in the den, and then there’s another group or another segment of consumers that are really pretty laptop-centric and they’ve been getting significant value from our service. So we are very pleased with the progress there.

Heath Terry - Credit Suisse

Is there a penetration number that you can talk about -- 20%, 25%?

Reed Hastings

No, again, same as Barry referred to. For competitive reasons, we’re going to be a little quieter going forward. We’ll give you qualitative updates on where it’s trending but it’s been very successful for us and we’re very excited by it.

Heath Terry - Credit Suisse

Have you got any feel for, been able to get any feel from those that have adopted it, are they changing their by mail rental habit? Are they still consuming the same number of discs by mail and just Watch Now on top of it? Or is this actually a replacement for them?

Barry McCarthy

Well, we’ll be able to get a feel for that over the next probably two years, in terms of how our gross margin evolves, to see how much substitution there is. In the best case, there’s enough substitution that we are able to maintain pricing and maintain gross margins, but we don’t have enough evidence to believe in that. It’s more of a desire at this point.

And I point out that without a control set, i.e., a large set of subscribers that didn’t have online, it’s really hard to tell mixed in with the seasonality and the other factors going on, you know, is it because of online video or is it because of fewer big hit movies this Q3 than in the past.

Heath Terry - Credit Suisse

Okay, great. Thank you.

Operator

We’ll take our next question from Gordon Hodge with Thomas Weisel Partners.

Gordon Hodge - Thomas Weisel Partners

Just a follow-up, just on the fact that you had a 1% decline in gross subscriber additions. Given the fact that you didn’t change your pricing until July and I think Blockbuster took the foot off the gas on marketing sometime in July or early August, my guess is that your trend in gross subscriber adds is stepped up considerably, so that you are actually pacing up into Q4, or maybe you can -- if you can’t comment on that, maybe just comment on the gross subscriber adds August and September, that would be great. Thanks.

Barry McCarthy

Well, I think you see in our increased guidance for Q4 how we feel about the net of those trends, and we are very excited about those. Obviously we are not guiding explicitly to gross adds, but we are making some real progress by continuing to focus on great execution.

Gordon Hodge - Thomas Weisel Partners

But it’s probably fair to say that you are up in September, or you were up in September and August?

Barry McCarthy

I didn’t confirm or disconfirm that for you, Gordon. Sorry about that.

Gordon Hodge - Thomas Weisel Partners

No worries. Thanks.

Operator

And that does conclude today’s question-and-answer session. At this time, I will turn the call back over to you, Mr. Reed, for any closing remarks.

Reed Hastings

Thank you to everyone. We look forward to talking to you again in a quarter. Thank you.

Operator

That does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Netflix Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts