Netflix Inc (NFLX) 2002 Q3 法說會逐字稿

Good day everyone, and welcome to today's Netflix third quarter 2002 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Chief Financial Officer for Netflix, Mr. Barry McCarthy. Please go ahead, sir.

Thank you Vicky, and welcome ladies and gentlemen to the 2002 Netflix third quarter earnings conference call. We released our earnings for the third quarter at 1:01 p.m. today, Pacific Time. The earnings release in this conference call are available on the company's investor relations website at netflix.com. A rebroadcast of this call will be available at the Netflix website after 5 p.m. pacific time today. Some of the information you will hear during this call, including our guidance regarding the company's future performance consists of forward-looking statements, and these statements are subject to risks and uncertainties that could cause actual results to differ materially. For a detailed discussion of such risks and uncertainties, please review our filings with the Securities and Exchange Commission, including our prospectus filed with the commission on May 22, 2002.

With me today is Reed Hastings, the company's founder and CEO. Because many of you have not had a chance to read our earnings release, I will begin today's call with a brief review of our financial results for the third quarter, and then Reed will reveal recent developments with the business, and comment on competition, after which we will open the phone lines to questions.

The third quarter was, by every financial metric, another strong quarter performance by Netflix. The summary key financial metrics for the recent quarter include total revenue of $40.7 million dollars, gross margin of 47.2%, net loss on a GAP basis of 1.7 million, EBITDA of 6.3 million, and free cash-flow of 5.8 million. Total revenues for the quarter grew 116% year-over-year, and 12% sequentially, paced by growth in paying subscribers. We acquired 277,000 new trial subscribers during the quarter, a 17% increase verses the second quarter. our expectation for subscriber acquisition cost was $40 per new trial subscriber.

We came in at 33.57 per new trial subscriber, 15% better than planned, at a 2% improvement from the second quarter. Gross margins for the quarter was 47.2%, in line with our guidance of 47% to 48%, and down from 50.2% in the second quarter of '02. For those of you new to the Netflix story, the decline in gross margin results from the recent postal rate increase, along with higher disc usage by subscribers served by the expansion of our regional hub, and deeper inventory buying of back catalog discs to better satisfy subscriber demand for content.

As we previously announced, average monthly turns - churned for the quarter rose 7.2%, from 6.7% in the prior quarter and 6.5% in the prior year. The increase in churn was primarily attributable to making it easier for customers to cancel, by allowing online cancellations, instead of requiring the use of an 800 number during business hours. The increase occurred primarily among new trial subscribers, and was consistent across acquisition sources and geographic regions, which is to say that Blockbuster's test cities was not a contributing factor. We expect churn to remain in the 7% to 7.4% range in the fourth quarter. we are always trying to improve our business fundamentals, and in the third quarter churn was higher than the

expected. Subgrowth exceeded our guidance, subscriber acquisition costs was better than

expectations, and gross margin was dead-on our guidance.

It was a strong, but not a perfect quarter, and we aspire to do better. For the fourth consecutive quarter, free cash-flow was positive, generating 5.8 million in the third quarter, or $0.20 per fully diluted share, up 24% from 4.6 million in the second quarter of '02. year to date we have generated $11.1 million in free cash-flow. Total cash and cash equivalence, including short-term investments at the end of the quarter was $98 million. This equates to roughly $3.42 per fully diluted weighted average share. Our earnings release includes updated guidance for the fourth quarter of '02. We raised our

guidance from 2-1/2 - 4 million to 5 - 6-1/2 million, and we lowered our guidance for proforma operating loss before stock base comp expense from 3 - 6 million to 2 - 4 million. In this weak economy, and these uncertain times, we remain comfortable with our previous guidance

subscribers of 830,000 to 860,000. This concludes my remarks on financial results, and now I would like to introduce our founder and CEO, Reed Hastings.

Thank you Barry. Over the last three months, our stock has been affected by uncertainty surrounding Netflix long-term future. we believe we can, over the next five to eight years, grow to over a billion dollars in revenue, generating 100-200 million in free cash-flow annually. To accomplish this, we will need 4% to 5% of TV households to subscribe to Netflix. We have already achieved 3.5% of TV household penetration in our first market, the greater San Francisco Bay area. And our penetration continues to climb steadily.

Recall that because of the location of our initial warehouse in San Jose, Bay area subscribers, and only Bay area subscribers, have enjoyed free, generally overnight delivery for the last four years. As you know, over the past year, we opened ten metropolitan shipping centers. These centers provide approximately 50% of our members with generally overnight delivery. With the strategic goal of growing more of the country,

the current Bay area penetration levels. The Sacramento area, as an example, where we opened our first metro shipping center, has now crossed the 1.7% of TV household penetration mark. Boston, where we opened our second metro center, has passed 1.3% of TV household penetration. And the Los Angeles area, where we opened our third metro shipping center, has passed the 1% TV household penetration mark.

To continue to lay the foundation for a billion dollar revenue company, we plan to start opening approximately one new metropolitan shipping center every month, in such cities as Dallas, Chicago, Miami, Phoenix, and Philadelphia. The cost of these additional centers is built into our current plan and guidance. By the end of next year, with approximately 24 metro shipping centers, we can reach 70% of subscribers with generally overnight deliver. Not only do these additional centers help us grow, but they form yet another barrier to entry. Any company that wishes to be a credible on-line threat to Netflix must also open several dozen metro shipping centers, just to be competitive. We believe our lead in this market is substantial, our focus is relentless, and that we will emerge from the competitive battle, maintaining our dominant market share.

Just for example, as Amazon has gone against Barnes and Nobel and Wal-Mart. In fact, as you have read, walmart.com has launched their DVD rental service, which provides overnight delivery to the Atlanta area, leaving subscribers in the rest of the country to wait up to five days for their DVDs to be delivered. Until Wal-Mart supports their rental service with a few dozen metro warehouses, they will not be a serious competitive threat. Therefore, we assume they will roll out metro warehouse next year, and we think walmart.com will then be no more successful than they have been with their Wal-Mart-connect ISP service. For those of you not familiar with it, Wal-Mart launched their ISP service last year, at their shareholder meeting, to great fan fare, at $9.94 a month, a whopping 60% discount to AOL. In their first year of marketing Wal-Mart-connect, they have had little success acquiring subscribers. Wal-Mart is just not a subscription marketing machine.

One of the many challenges Wal-Mart faces in extending their brand to new on-line services, such as Wal-Mart-connect and a Wal-Mart DVD rental service, is their customers do not think of Wal-Mart as an on-line service provider. Even 60% discounts do not change customer perceptions about Wal-Mart as an online service provider. The other major competitor, Blockbuster, is still in test mode. They are testing on-line DVD rentals through their subsidiary dvdrentalcentral.com, and they are testing DVD rental subscriptions from the stores. The online service is not a competitive threat unless and until Blockbuster opens several dozen metro warehouses and promotes their online service from the stores. Blockbuster is also testing store-based subscription at several different price points from $18 to $28 per month. Because of their strong band, Blockbuster generally tends to premium price so we expect, if they go national with this program that it will be in the $25 to 28 per month range.

During the fourth quarter, one of the most exciting development for Netflix will be the release of our third major version of our CineMatch movie selection system. This new version is substantially more accurate, and thus more useful to our members. The new version embodies all that we have learned over the last three years based upon the over 100 million movie ratings we have collected from the community to date. The new version will help us continue to differentiate our service and to provide our subscribers an unrivaled experience. Before we open the phone to question, I would like to thank all of you who are subscribers for your business.

Particularly, those of you in Snoqualmie, Washington, where over 6% of all households subscribe to Netflix. I'd like to thank those of you in King Salmon, Alaska, where over 10% of all households subscribe to Netflix. I'd like to thank our own investors, who probably live in

Valley, having driven us to 10% in

Valley, California, also. And finally, a special thanks to those of you that live in Rancho Santa Fe, California, where 20% of all household subscribe to Netflix. With that, I'd like to open it up for questions.

Thank you. The question and answer session will be conducted electronically today. Anyone wishing to ask a question may signal by pressing the * key followed by the digit 1 on your touch-tone telephone. And if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And once again, that's * 1 to ask a question and we'll pause for just a moment.

And our first question today comes from Safa Rashtchy of Piper Jaffray. Please go ahead.

Good afternoon, guys. Good quarter. Couple of questions on the cost structure that you have. You had the advantage of being able to somewhat manage the demand and offer additional titles that the user may be not be immediately coming to rent, and I'm wondering if you're seeing any changes in that trend? Are you still renting the substantial portion of your rentals on the back catalog and what are the economics of that for you as you rent more on the back catalog?

Hi, Safa, its Barry. The mix of back catalog versus new release breaks out roughly this way, let me begin by defining new release. It's street date to 12 weeks. So anything 13 weeks or older we consider back catalog. The mix in there recent quarter was roughly 72% back catalog with the remainder new release. It's moved within 2 percentage points in the last 9 months. So it's been fairly stable. In terms of new buying, the mix is 70/30, 80/20 new release/back catalog. Where we tend to feel inventory pressure is mostly in back catalog discs by way of example, The Graduate. Every couple of months we need a couple of thousand copies and as soon as we buy those copies, they are 100% utilized and they stay 100% utilized forever. In terms of the economics, it is actually slightly detrimental to the P&L to buy discs and depreciate them because we depreciate them over such a short period of time, 12 months on a sum of the year digits basis. The acquisition costs generally ranges from 13 to 18 bucks and the older the content the less expensive it is. New release content from studios, whether it's under red share on a GAP basis, tends to be less expensive. The useful life of the DVD, the costs tend to be roughly equivalent.

Good, and Barry, could you also comment on the customer acquisition cost, which was lower than we expected? What should we be assuming going forward and what factors determine that and what's in your model?

Well, it depends a lot on competition. One, we have been guiding towards 40 bucks, which is an increase over the historical spending because of course, there is some uncertainly about what it would be on a going forward basis. And two, because we knew that if we spent slightly more that we could acquire more subs and grow faster and so, I think we would be comfortable seeing you hold constant the forecast for subscriber acquisition costs at the guidance level we previously gave, which is in the range of $40 per acquired sub.

Good. Thank you.

And our next question will come from Gordon Hodge with Thomas Weisel Partners.

Good afternoon. Couple things. One, I've actually been in Snoqualmie, Washington and I can understand why they might be heavy users, but... that's pretty close to my home town. But the curious about the marketing spending in the quarter. How much was word of mouth, roughly? I think that had been picking up for you, versus DVD inserts and the online or CPA related marketing? Thanks.

The mix was roughly constant, quarter to quarter. Historically, word of mouth has tended to increase around the time of the holidays in the fourth and the first quarter. It remains to be seen what'll happen in the coming quarter given the uncertain retail environment. But in the current quarter, it didn't move.

OK. Great. And any special plans for fourth quarter marketing this year, you know, different from what you did last year? Any new mediums you might be using or is it pretty much the same plan as originally?

It's Reed, Gordon. Continuing to explore new channels. Doing a little bit of TV, doing more with Best Buy. So continuing to expand the channels in all the ways that you would want us to but there's nothing, sort of deeply structural, there's no big expensive initiatives or commitments.

Sounds great, thank you.

And as a reminder, if you do have a question, today, simply press *1 on your touch-tone phone. And we'll now go to Justin Baldauf with Merrill Lynch.

Great, thanks a lot. Just a quick clarifying question, Barry, to start out with. In terms of your new guidance, for EBITDA and operating income, I think you raised it slightly even while you're maintaining your top line guidance. Can you talk about, it also looks like you're maintaining your guidance for gross margin. So, can you talk about what's driving the improvement in guidance on the bottom line?

Sure. We set the guidance originally in a very conservative way, knowing that if we missed, you would press the stock. Now that we are closer to have the fourth quarter closer at hand and have greater visibility and the run rate for the business and how expenses are likely to resolve themselves, we feel less compelled to be as conservative as we were previously. So you shouldn't interpret it to be any structural shift in the business. It's just us being slightly less conservative than we were previously.

OK. Great. And then, the next question, I guess, would be a follow up, to some of the comments that Reed made earlier about penetration by market, which I found very interesting. So I think, Reed, just to clarify, you said that the penetration today in San Francisco is about 3 ½% in the Bay area?

Correct. San Francisco, Oakland, San Jose, Peninsula, the whole metro region.

OK. And ...

Slightly higher in San Francisco itself.

OK. And then, outside of the Bay area, nationwide, where is it today?

I think it's .63.

.63, OK.

You'll find that number in the release on October 1.

OK. Great. And then, so, you, .63 outside of the Bay area but then in some of these hub cities, Sacramento is 1.7, Boston is 1.3 and Las Angeles is 1.0?

Correct.

So those numbers are correct? OK. So significantly higher than kind of the rest of the market. Let me ask you this, if Sacramento was the first, I guess region where you rolled out these hubs and it's now at 1.7, what was, when was that hub actually rolled out and when did you actually start to see penetration increase in that market?

Well, we see penetration increases in all markets all the time because we're growing. So I think you have to ask it is, when did we see some marked acceleration beyond, you know, what might have been expected. And it took a few months. We first opened that hub almost a year ago. It was our test hub to test out how much the improvement would be and because Netflix is a word of mouth phenomenon, we don't get, it's not like running an ad campaign, where you get a sudden spike. What you get is your users are happier, they tell more people and that gets more people in. They tell more people and in all these cases it grows fairly organically. So if you look at the penetration curve, you know, over the past 16 months, say, on Sacramento, you can't discern any sudden

in the curve. It's just a continuing up and to the right trend.

OK.

Is that helpful?

Very helpful. And so, you mentioned some of the smaller regions, I guess, where Gordon has spent some time that had remarkably high penetration rates. Are the major cities that you mentioned, Sacramento, Boston, LA, are those, outside of the Bay area, the cities with the highest penetration?

They are.

OK. Great. And then, just to go back to the notion of

. You know, this is obviously something that can be challenging to predict. I guess, you guidance, just to clarify it, for the fourth quarter is 7.0 to 7.4%? Is that correct?

That is correct.

OK. And then, going forward, I know you're not providing specific guidance, early guidance at all for 2003, but any thoughts qualitatively on how you would expect that number to evolve over time or is it too early to really comment on that?

Yeah, I think it's really better for us to comment on that one conference call from now when we lay out the guidance for next year.

OK. Great. And then, last question, in terms of, Reed, you talked a lot about the evolution of the market place, the potential of, I guess now the entry of Wal-Mart into the market and the fact that Blockbuster is testing an online service through DVDrentalcentral.com, and you also laid out, I guess some long-term financial goals based on certain penetration rates, which I'm looking through my notes here, I think 4 to 5%, that's nationwide?

Correct.

what would underlie, I guess, any time you build up a long-term projection like that, in the face of competition you almost have to make assumptions whether they're implicit or explicit about what share of the market you can ultimately, what you can ultimately capture and then how big the market will be. What are you thoughts in terms of Netflix's market share, say five years out compared to Wal-Mart and Blockbuster, assuming that they're actually still in the business.

I think that it's most likely that it will emerge like Amazon or eBay. That is, Amazon, you know, has approximately 90+% of the online book market and I imaging that whoever wins the online rental market will come to have that kind of dominant share. There is so much benefit to scale and obviously, we are very intent on being that winner. But I imagine the market structure is such that there'll be one company that has essentially all of the market, as we've seen with eBay, as we've seen with Amazon.

OK. Great. Thanks very much.

You bet. Thanks, Justin.

And we'll now go to Dennis

of

associates.

Yes, good afternoon. Couple of things. What is the cost of the new fulfillment center and where is that showing up on the balance sheet?

Hi, Dennis, it's Barry. The, most of the new fulfillment centers are in the range of 2 to 3 thousand square feet and then as the subscriber base in a region scales the hub scale most of the cost is in rent and the rent is in the neighborhood of 30 to 70 cents a square foot. And they all tend to be relatively short-term leases. In terms of facilitation expense, most of the cost is less than 1000 bucks per item and so we expense it and we're talking about PCs and printers and scan guns. All of the barriers

related to the hub strategy is embedded in software.

So, this isn't like a

and whatever it is that Blockbuster has in Texas?

Correct. It is not. It's the software that when you return a disc, and that disc gets scanned, it's the software that knows that Dennis sent it back and it's the software who knows whose next in the queue to get it and it's the software that knows if it's printing a return label inside the region or outside the region and it's the software that tracks every DVD in the country simultaneously and all orders in the country simultaneously. And all DVDs are shipped individually.

In the quarter the revenue from selling DVDs went down a significant amount. What was the cause for that? Were you selling fewer DVDs or were you selling the same at less revenue and what, are these all going through Best Buy?

First of all, none of them go through Best Buy. The dollar amount did decline quite a bit but the dollar amount is relatively small so on that 40 + million in revenue, the sales were less than 600,000 or something in that, 568. So the important thing to know about the sale of used hardware is that it's a fundamentally different strategic role in Netflix then perhaps it does in bricks and mortar. It's not an important component of the economic model. Doesn't substantially reduce the average cost of content. Most of the discs we buy we turn for their entire life, and so occasionally, we make buying mistakes, and when we do, we sell it wholesale, and most of it shows up in bricks and mortar, and none of it ends up in

.

And then, last quarter you commented that the number of discs rented per average consumer

by the average consumer, was I think, 5 discs.

Yeah.

Has that changed at all? And then could you discuss the what you see as the compelling factors in keeping the customers. Is it price, is it turnaround, is it - you know, what is going to allow you to keep a customer away from Wal-Mart?

I will do the average usage base, and then I will take that competitive response over the

. In terms of average usage, it has been fairly stable. It moves around some seasonally, but the average usage in the most recent quarter was about 5 as well, as it was in the prior quarter.

Dennis, it's Reed. There is a couple things that are big barriers, and as

competitors will have a hard time.

easy to understand is the shipping time. For a New York based customer, their served by us out of Flushing, so they get overnight delivery in the five Burroughs, and two day delivery at Long Island and in upstate, etc. walmart.com has only a single shipping center in Atlanta, so that means it takes three to five days to get a disc - DVD to a customer in New York or anywhere else in the country. And so the remarkable difference is really in ship time. That's why, we think, it's almost like a half launch for Wal-Mart to launch their service without having metropolitan shipping centers. It's a little like having an ISP with only Atlanta dial-in numbers to call into. You know, it is just it's not a very scalable thing. So you have to assume that their planning on roving it out nationally, but until they do, it's really not a serious threat.

Do you get any sense as to how much of a dollar differential there has to be before that has any impact, or is it really just the shipping time that is the main thing?

Well, if you look at connect-connect, that's $9.94, and of course AOL is $23.90, so that's a 60% discount. And that discount has not been sufficient to get consumers to use the Wal-Mart ISP, and it shows you just how strong brand is, and customers - a lot of customers love Wal-Mart for what they are, in terms of a great prices on hard goods. They just don't see them as an on-line service provider, and so even a 60% discount doesn't seem to move much, so I think price is probably not one of even at the top three or four factors.

Would being the ability to pick up and deliver at a store like Blockbuster or if Wal-Mart went that route, would that be a significant damage?

Well, it's hard to say, because we haven't seen it in general subscribers to Netflix,

the convenience of the free home delivery. So I imagine if you combine it with a driving, you know, it's not - it's kind of a mixed mode solution. So I think the most effective competitive strategy for Netflix competitors is what Blockbuster is doing, which is - or testing anyway, which is the DVD rental subscriptions from the store. So I look at it, and when Wal-Mart or Blockbuster are doing on-line efforts, they are on my turf, and you know, we'll do fine. We will really not have a big competitive battle there. When Blockbuster is changing the way store based rental is, that's probably the most credible way to go about competing with Netflix.

And the challenge for Blockbuster is, of course, that's changing a $5 billion revenue stream to deal with a $150 million dollar competitor. And as you probably know from long time video analyst, Wal-Mart actually did get in the video rental business in store based situation about six years ago, and then got out of it. So I think they are pretty convinced that store-based rental with a Wal-Mart parking lot and distance to the store, etc., is not very effective.

One of your competitors, I guess, the name was

, suggested that the market is only a million and a half subscribers to begin with, so why bother?

Well, they are blessed with more knowledge than I am. I don't know how they get the size of the market.

OK. I must say the only complaint I have is that when the pizza gets here with the DVD, it's cold. Thank you.

Thank you Dennis, and I would welcome

you like to visit our Flushing warehouse, and you can see for yourself the sort of lightweight operations and software intensive operations that we have. We would be happy to have you there.

Thank you.

And we will now go to Gordon Hodge with

.

Yeah, just a follow-up. I am curious. I noticed Wal-Mart and Blockbusters on-line service are offering 30 day trials, and I have - I am wondering if you feel compelled to match that, or are you finding it in your trial trends - you know, are satisfactory as with the current ten to fourteen day trial period? Thanks.

Thanks Gordon. We don't feel compelled to make any change there.

Good, and then one last question. You do have a fairly significant cash balance, and I am wondering, with the stock down where it is, have you thought of the idea of buying back some stock, and is it something that you might entertain, or is it sense of competition out there just make you

to entertain those thoughts? Thanks.

We have what Jerry, Gordon - we will continue to look at it.

data tends to suggest that buyback programs haven't historically been very successful in moving stock more than 5%, but I am sure there is - there is a price point at which we would feel compelled to come off the bench. We will continue to be watchful.

Thank you.

We will now go to

with

.

Hi guys. A couple quick questions. Any more insight on kind of a demographics of the customer you getting?

The demographics have stayed pretty constant in the last few quarters. We are now 50/50 in terms of gender. So it's a pretty mainstream demographic. The real shift was really happening in the DVD market, where the early first two years is pretty nichey, you know, high income mail kind of product, and now with it's $49.00 pricing, it has become very much a family product. So our - we've got a very broad range of demographics, basically everybody who's on line.

OK. As far as the - if you have got any insight on the Wal-Mart D.C. that they are using, are they doing that out of a one of their existing distribution center, or have they set up a separate facility like you guys have?

It is out of one of their existing facilities. It serves the Pick-n-Pack for all of walmart.com.

And have you heard anything about Columbia House entering the market at all?

Just what we've been reading, that they would like to do a private label service sometime next year.

Alright, and just to clarify on your D.C. expansion. That's one D.C. per month?

Correct.

And what do you feel like that caps out, as far as getting a footprint?

Well, lets see. That gets us at the end of next year, we will get about 70 percent, and along the way, we'll be evaluating, you know, how much further do we want to go, you know, do you want to push them, do we want to push in the small towns, that kind of thing. The theoretic limit is probably about a hundred of them, I think, then you cover 97 or something percent of the country. So, you know, we'll continue to evaluate it. And, again, you know, you refer to it as a

, which makes it sound kind of formidable ...

I actually have been to them, so I shouldn't be using

, I know how ...

You know it's basically a room in a town ...

Yes.

...and, you know, when you compare the--even if we have 40, that's compared to Blockbuster's four thousand stores, you know, it's incredible leverage to do this.

OK.

I just want to chime in and point out that, notwithstanding the fact that we've opened 10 of these, the fulfillment expense as a percent of revenue has dropped steadily over the last four quarters. And so we've been able to do it without increasing the expense of getting DVDs out the door.

OK. Final question is of this existing subscriber base now, what percentage of that is getting, typically, the film overnight?

Fifty percent.

Fifty percent. OK, great. Thanks.

Great.

And next is Morgan

with Manchester Management.

Hi, guys. A couple of questions. First of all, in looking at the subscriber projections for the fourth quarter, and then looking at the revenue projections, there seems to be a pretty substantial difference in the subscriber growth rate and the revenue growth rate. So,

they're up kind of 11 to 16 percent, but revenues are kind of flattish to up 10. What's the reason for that differential?

Hi, Morgan, it's Barry. There are a large number of subs that come in in the last two weeks of the quarter, typically. So it's a timing difference. And then, of course, those subs become revenue paying subs in the first quarter and so you may see a disproportionate increase in revenue relative to the growth in subs in Q1. But it's just a timing difference.

OK, so it's just a very non-linear quarter around the holidays?

Yes, exactly. The average revenue per subs in the

is dead-on, no change.

OK. Second question, do you--I mean, you know, Wal-Mart is out talking about having 12 thousand discs, but in kind of going through their Web site, an awful lot of their discs seem to be very long-wait, you know, which in this case is months. So, do you have any idea

what their inventory levels are actually like and how far down that road they've gone?

It's Reed here. We have, of course, our users of the site, it sounds like you have been, I think, there at the very beginning--if you look back at our Web site three years ago when we started, we also had a lot of very long-wait titles and it just takes hundreds of man-years of software development to be able to buy the custom buying systems and custom demand management so that one can avoid the very long wait state. So I don't think it's so much a question of buying, it's a question of software management, featuring the wrong thing on the home page for too long, that level of automation feedback loop. It is, you know, yet another example of where I think walmart.com will find that the online rental business is categorically different and harder than anything they've done before.

OK. That's all I needed to know, thanks.

We now go to Raymond Jones with

.

Hi, gentlemen, congratulations on your quarter. Quick question on Wal-Mart. Would you anticipate them duplicating the Best Buy strategy where they would place a flyer for their service in their substantially lower-priced DVD players and then eventually leveraging their distribution system, which is around 70 to 75 distribution centers in the United States?

On the marketing side, if I were them, I certainly would. I would, you know, be promoting their DVD rental service on every DVD player, on every DVD movie sold in Wal-Mart stores. The clash is is that the category managers for the DVD software, for example, in Wal-Mart are pretty interested in consumers buying those discs instead of renting them ...

Sure.

... so it's not clear to us, you know, how easy it's going to be for walmart.com, which is, of course, its own division, to get the cooperation of the store managers to put those rentals throughout. But I think a conservative assumption is that they will manage to do that and play corporate team ball and be similar to our Best Buy strategy. Now, if we only had Best Buy as our primary source, and Best Buy's a great source, but if that was our primary source of subs, we would be a pretty small company.

Sure.

So I don't think it of itself is very determinate. Then

in terms of the distribution centers, no, I would imagine they would get custom space. Again, they've got divisional P&Ls, the rent is not the expensive part, it's the software that makes the operations so that, for example, the very long waits that we referred to before don't happen, the inventory has to be very well balanced across the different communities. It's all of those software systems that have to get built-up.

OK. One more quick question about your subscriber base. I was wondering if you could give a percentage breakdown on the price plans for your subscriber base?

Sure. You'll notice that our average revenue per sub's about 20 bucks, which tells you that for every, you know, consumer that's on the light program, there's one on the heavy program, you know, we have the $30 to $40 in the 14 ..

Yes.

... and it's--I think it's 92 percent, something around there, over 90 percent that are on the standard plan ...

Yes.

... so virtually everybody.

OK. Thank you.

You're welcome.

That will conclude our question and answer session. I'd like to turn the call back over to Mr. Reed Hastings for any additional or closing remarks.

I'd just like to thank all of you for your support. I know it's been a bit of a trying quarter for the market in general and NetFlix in particular. And we continue to stay focused on growing a big business and look forward to doing that with your support over the nest several quarters. Thank you very much.

Thank you and that does conclude our conference for today.