Netflix Inc (NFLX) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Netflix first quarter 2008 earnings release conference.

As a reminder, today's call is being recorded.

At this time, for opening remarks and introductions I would like to turn the conference over to Deborah Crawford, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, and good afternoon.

Welcome to Netflix's first quarter 2008 earnings call.

Before turning the call over to Reed Hastings, the Company's Co-founder and CEO, I'll dispense with the customary cautionary language and comment about the webcast for this earnings call.

We released earnings for the first 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 Investor Relations Web site at www.netflix.com.

A rebroadcast of this call will be available at the Netflix Web site 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, 2008.

And now, I would like to turn the call over to Reed.

Thank you, Deborah, and welcome everyone.

Our goals at Netflix are simple, to be a great Internet movie service by combining DVD-by-mail with Internet streaming and to deliver growing EPS and subscribers every year.

In Q1, we made significant progress on those goals and our momentum is reflected in our increased subscriber guidance for 2008.

We currently expect at the midpoint of our guidance, 9.4 million subscribers by year end, an increase of 26% from 2007.

In terms of EPS growth at the midpoint of our guidance we expect $1.23 in EPS for the year, up 27% from 2007.

In Q1, the most telling metrics were subscriber net additions at 764,000, SAC at less than $30, and churn at 3.9%.

All three were record performances over our six years as a public Company.

We have been executing very well for many quarters as we steadily improve our service metrics, our customer satisfaction, and our competitive strength.

Q1 was consistent with this strong trend, as opposed to something new.

But in late December, our most direct competitor further rationalized their pricing which contributed to our Q1 surge in growth.

Some of the positive impact from our competitors' price hike will be long lasting and some of it was a one-time benefit as their subscriber base responded to their price increase.

So while Q1 was an all-time record in net additions, we don't expect Q2 to be a record second quarter or 2008 to be a record year in terms of net additions.

In addition, we are planning on spending slightly less on marketing over the next three quarters than in the comparable periods of 2006, our biggest net additions year.

We are very pleased, however, with our strong growth expectations of approximately 160,000 net adds for Q2 and 1.9 million for the full year, assuming the midpoint of our guidance because these growth levels are allowing us to aggressively fund our instant watching efforts.

On the industry front in Q1, the High Def format war ended which is great for consumers and great for those of us with a vested interest in disc-based movie watching.

Over the coming years, Blu-ray DVD players will fall in price and become more widespread.

With the success of Blu-ray and its emerging economic importance to the studios, the DVD market is more likely than ever to remain enormous for many years into the future.

As you are aware, purchasing Blu-ray DVDs costs more, both at retail and wholesale, than standard definition DVDs.

Consumers are used to paying more for high definition content in every other channel including video rental stores, video on demand and cable channels.

Because of the higher cost of Blu-ray and the consumer expectations around High Def content, we are planning on implementing a modest monthly premium for access to Blu-ray some time this year.

Today, the percentage of our subs who rent Blu-ray is in the low single digits, but it is sure to grow going forward.

While the success of Blu-ray is important to us, just as important are the improvements we have made to watching instantly over the Internet.

Our selection continues to grow and we now have over 9,000 movies and TV episodes available.

Today, our instant watching functionality is only available on Windows PCs which works well for our subscribers who is are comfortable watching video on their lap tops and for our technophile members who hook up their computers to their TVs.

We have been happy, we have been very happy with the response to date amongst these groups.

And viewing is growing rapidly.

For many subscribers, however, watching instantly will expand in relevance as we make TV viewing easier and cheaper.

As we talked about last quarter, we have adopted a partnership strategy in terms of Internet TV connectivity.

As we increase our online content spending, our service becomes more attractive to consumers which in turn makes us more attractive to CE partners.

In particular, we want our clients' software integrated into Internet connected Blu-ray players, game consoles, TVs, and stand alone set top devices.

In January, we told you we were working with LG Electronics for a second half of 2008 product launch.

At this point, I can tell you we have LG plus three additional partners actively working on integrating our technology into their products.

Three of the four partners are major companies which each sell millions of devices per year and will enable the Netflix functionality in some of those devices likely in Q4 of this year.

The fourth partner is a small company which will likely launch sooner than Q4.

Understandably, there has been investor excitement and along with it rumors about who we have partnered with.

Despite our great success attracting major partners, about which you will see announcements in the coming quarters, these partnerships only demonstrate our success at providing Internet delivered content to our subscribers at no additional charge.

Nothing about these agreements will be material to our financial results for the foreseeable future.

While our efforts are a necessary first step as we expand into Internet delivery, providing free access to content is not a long-term formula for profitable growth.

My second observation is that while we are off to a good start, providing consumer access to Internet-delivered content on their TVs will require many partnerships in addition to the big ones to be announced this year.

My third and final observation is these partnerships have some execution and implementation risks as with all new technology.

We will take it year by year and model by model as we and our CE partners come to understand the opportunity better.

The big challenge for us remains the same as it was when we first launched our Internet delivery initiative, to satisfy ourselves and our shareholders that our online content spending will result in increased subscribers and profits.

Despite my warnings to you about the many hurdles ahead, I would say we are thrilled with the progress we have achieved to date.

Of course, as we succeed at new and improved consumer models for online movie enjoyment we are sure to attract more competition.

Our competitive advantage is that if a consumer spends time on the Internet and enjoys movies, they are likely to be or become a Netflix subscriber.

As we grow a larger subscriber base, our ability to offer both online streaming and DVD-by-mail at one low price means that we have a major advantage over any stand alone Internet delivery service, at least for the many years ahead, while DVD is significant.

In addition, the Netflix Web site, which we constantly improve, includes billions of movie ratings, millions of customer reviews, and an engaged community which makes it particularly well suited for choosing movies to instantly watch.

Let me wrap up where I began.

Our goals are to be a great Internet movie service by combining DVD-by-mail with Internet streaming and to grow subscribers and EPS every year.

The midpoint of our 2008 guidance of 27% EPS growth and 26% sub growth showed the effectiveness of our approach.

And now, I'll turn the call over to Barry.

Thank you, Reed, and good afternoon, everyone.

Three quarters ago on the July earnings call, we announced a price cut on some of our most popular subscription plans.

Lower prices, we said, was an investment in faster growth.

Faster growth is also what we expected when we raised guidance in February of 2008.

Faster growth is what we reported today and faster growth is what we are forecasting for the remainder of 2008, both because of the ongoing benefits from lower prices and because of the current competitive environment.

For the first time in six quarters, we saw an acceleration in year-over-year sub growth in Q1 to 21%.

Growth and net subscriber additions set an all-time time, churn returned to its all-time low of 3.9%, and SAC reached a six-year low of $29.50.

Looking back on our history as a public Company, I would say that on balance, this was one of our strongest quarters.

We even saw strong growth in the Bay area, our highest penetrated market, where household penetration reached 18.6%, up from 17.6% in Q4.

Growth was also strong in rest of the country, where average household penetration reached 7%, up from 6.3% in Q4.

My remarks today will cover our Q1 performance.

Next I will talk about our updated guidance for the remainder of the year and lastly I will comment on the $150 million buyback we announced in March.

And rather than repeat the information presented in today's earnings release, my comments will focus, instead, on four metrics.

These are gross margin, marketing spend, other income, and free cash flow.

Gross margin of 31.7% declined 210 basis points sequentially in Q1.

All of the decline was caused by a seasonal increase in disc usage which resulted in higher postage and packaging expense and fulfillment expense in quarter.

These costs were partially offset by an expansion in margin relating to content cost which declined sequentially as a percent of revenue.

The seasonal increase in usage in Q1 was in line with our expectations.

Marketing expense of $55 million increased $3 million sequentially, but declined by $17 million on a year-over-year basis for reasons I will explain in a moment.

But first I want to remind you that not only was this quarter's SAC of $29.50 the lowest it has been since Q1 of 2002, but it also declined 15% sequentially and 38% on a year-over-year basis.

Lower SAC was driven by changes in the competitive environment combined with the July 2007 price decrease, both of which contributed to better response rates to Netflix advertising and more organic growth.

For the remainder of the year, we expect lower marketing expense on a year-over-year basis, along with faster subscriber growth.

Given the trend towards lower SAC over the last two quarters, the question investors often ask me is why aren't you spending more money on marketing to grow faster?

The answer is we are investing more to grow faster, quite a bit more actually.

So let me explain where.

Last July, we said there are two ways to invest in faster growth, one, more marketing spending, or, two, price cuts.

The path we chose was price cuts and judging from our accelerated growth these past two quarters, the investment seems to be working well.

Interest and other income of $7.7 million grew 55% sequentially in Q1 as we realized $4.3 million in gains from the sale of short-term investments.

Next quarter and for the remainder of the year we expect other income to consist primarily of interest income without the benefit of additional one-time gains.

Free cash flow of $4.7 million in the quarter was $22.7 million better than the negative cash flow we saw in last year's first quarter and several million dollars better than we expected.

Like last year, we saw a decline in free cash flow from Q4 to Q1.

This seasonal decline was caused by a decrease in cash from operations as gift subscription sales slowed.

We also increased our CapEx spending on content to support new subscriber growth and brought 80,000 square feet of new office space online here in Los Gatos.

That concludes my comments on our Q1 performance, and now I'd like to share a few observations about guidance.

Like last quarter, our guidance for the balance of 2008 assumes the market continues to grow.

As in past years, we expect much of our subscriber growth will be front end and back end loaded in Q1 and Q4 respectively reflecting the historical pattern of seasonal growth.

For the same reasons, we expect Q2 will again be our slowest quarter of subscriber growth.

We expect to end Q2 with 8.3 million to 8.5 million subscribers and to end the year with an upwardly revised 9.1 million to 9.7 million subscribers.

Revenue growth will continue to lag subscriber growth on a year-over-year basis throughout 2008 because of the price reduction we implemented in Q3 of last year.

But we expect both subscriber growth and revenue growth to accelerate on a year-over-year basis in every quarter of the year.

With the growth of the growth accelerating in Q3 as the effects of last year's price decrease disappear.

In other words, the second derivative will increase a bunch in Q3.

Gross margins will remain steady for the calendar year with a slight uptick in Q4, despite the cost of our growing library of content rights to Internet-delivered movies and TV content, and despite an expected increase in postage expense of $0.02 per round trip mailer beginning next month.

With respect to guidance, I want to make a brief comment about expected tax rates.

We determined that some of our research and development efforts in recent years qualify for federal and state tax credits.

We anticipate filing appropriate refund claims in Q2.

The credits attributable to 2007 and prior years will be recorded as a one-time benefit in Q2 and those benefits will lower our effective tax rate in Q2 to roughly 26%.

For Q3 and Q4, we expect the tax rate to return to a normalized rate of 41% because these tax credits are no longer available at the federal level.

And finally, I'd like to provide an update on the status of our stock buyback programs.

During the first quarter of 2008, we announced and completed a $100 million buyback program repurchasing 3.8 million shares at an average cost of $25.99 and raising our cumulative share repurchases to 8.6 million shares at a total cost of $200 million, and an average cost of $23.31 per share.

In March, we announced an additional share repurchase program of $150 million.

All $150 million remains available to buy back shares.

In closing, I would like to summarize my remarks this is way.

We are off to a strong start in 2008.

Operating results were strong in Q1.

We reported strong results for three consecutive quarters and this momentum is reflected in the upwardly revised guidance we issued in today's earnings release.

Today we reported record growth in gross and net subscriber additions, a reacceleration in subscriber growth, the lowest SAC we have ever reported as a public Company and record low churn.

These metrics show the model is working well.

At the same time, the market for DVD-by-mail subscription services remains strong and the competitive landscape remains favorable.

Finally, as Reed mentioned, we're on track with our expansion into Internet video delivery and pleased with our success to date.

That concludes my prepared remarks.

Thank you all for joining us today, and now, operator, I think we're ready to take some questions.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble the roster.

We'll take our first question from Doug Anmuth, Lehman Brothers.

Thank you.

I have two questions.

First one is regarding Blockbusters' online subs, and can you talk, Barry, about how you would think about them if they were potentially to come for sale in the market?

And then, secondly, in terms of the profitability outlook that you have for 2008, it's a little bit lower than we would have expected given some of the increase in subscribers and also in revenue.

What else in particular is keeping down the profitability a little bit and how much is that due to higher than expected digital spending for the year?

Thank you.

Hi, Doug, Barry.

Let me do the second part of the question which is profitability, and I will flip the first part of the question over to Reed to deal with Blockbuster on line sub in the event of sale.

With respect to profitability, the model from our perspective, from an operating perspective is actually performing extremely well.

And to the extent that earnings for the calendar year are on a trajectory less than you were expecting probably the differential relates to the amount of spending that we are actually doing as compared with our forecast to bring onstream the capability to deliver movies over the Internet to different devices.

Primarily, the spending is on the content side, and as Reed said and I reiterated we are enormously pleased with the progress we are making there.

Doug, it is Reed.

A couple of years ago we were able to work out a soft landing for Wal-Mart.com because they had made a strategic decision that it didn't make sense for them, if for some reason Blockbuster made such a decision we could probably work something out.

But they have been in the business for a couple of years.

They have a big investment in their model.

I would anticipate them to stay in the business for the foreseeable future.

Okay.

Great.

Thank you.

Doug, Barry.

Let me make one additional point about profitability.

People who have been following us for a long time realize this and investors who are new to us may not.

Because we expense 100% of the cost of acquiring subscribers when they walk in the door there tends to be an inverse relationship in the current period between subscriber growth and profit.

So it is several quarters before an acquired subscriber becomes profitable.

To the extent that subscriber growth is running stronger than forecast, that pressure is in the current period, the P&L.

So if for instance our subscriber growth is stronger than you were forecasting, it stands to reason that our net income would be lower than you were forecasting.

Got you.

Great.

Thank you.

Next question, operator.

Okay, just one moment.

I apologize.

We are experiencing some technical difficulties.

Please stand by.

One second.

You are holding for the Netflix conference.

We are experiencing some technical difficulties.

We will try to get this resolved shortly.

We thank you for your patience in holding, and please continue to stand by.

Operator, if you want to e-mail us the next question, maybe we could answer it that way.

I will try.

Just one moment.

Again you are holding for the Netflix conference.

We will be resuming shortly.

We thank you for your patience in holding.

So a more productive way to keep this moving might be to have people e-mail me the questions.

My e-mail address is dcrawford@netflix.com and then we can just address them in order.

Okay.

If the operators come back, we will flip back to the voice.

Thank you, Ms.

Crawford, and I will let you know when our computer system has updated.

So we will see which analysts can type their BlackBerry message fastest to us.

Okay, so, Brian Pitz at Banc of America, can you talk about where the growth in subscribers is coming from?

Is it from offline or new users?

To what extent did hollywood Video impact your growth?

Brian, certainly Hollywood's closures of stores helps, but when we have done specific studies of neighborhoods, we haven't seen a super strong correlation.

So I would call it a positive background influence as opposed to a specific big driver.

We definitely saw a positive increase beyond our initial expectations for the quarter because of the Blockbuster price increase.

So that was the other contributor.

Other than that, no material difference from the standard flow of the past couple of quarters.

Okay, Brian, I'm going to do one more for you and then I am going to keep going.

Next question from Brian at B of A..

Can you comment on if you have seen any decrease in online advertising CPC, CPM rates due to a weaker economy?

It is Reed again.

No material change for us in the advertising climate.

Dan Ernst at Hudson Square.

Can you quantify online spend?

Where is it accounted for?

Online content I think that is, Barry.

Assuming the question is online content, Dan, it is accounted for in the cost of revenue line.

Okay.

From Michael Olson at Piper, when you said gross margin will remain flat for the rest of the year with a slight uptick in Q4, just to clarify, are you saying Q2 and Q3 gross margin will be flat with Q1?

I am, yes.

Second question.

What kinds of devices will the partners integrate Netflix with?

Is it stand alone set top boxes or devices that consumers are already buying like flat panel TVs or Blu-ray players?

We see the largest opportunity in multifunction devices such as Internet connected TVs, Internet connected Blu-ray players, Internet game consoles.

But the set top into stand alone is a little more flexible.

So some of the early partners may do those because they're easier to get to market.

But it will be a mix and over time, I think, the volume will be in the hybrid devices.

Okay.

This is from Heath Terry at CSFB.

With the benefit from the lower tax rate to net income, why isn't there more of a positive impact on to net income guidance?

Is there an offset in some other part of the expense structure?

Heath, Barry.

No, there's no offset someplace else in the expense structure.

It's just that we continue to invest stronger in growth and we continue to invest strongly in delivering ED content to increase the number of titles that we have licensed.

So, said in the alternative, if net income, if we forecast lower net income, as a result, say, of a higher tax rate, some place in the P&L we would be paring our investment in future growth.

Okay.

From Andy Hargreaves at Pacific Crest Securities.

What other models are you considering for instant watch?

Do you expect to have a distinct model for CE customers versus current customers?

Andy, I'm not sure exactly what you meant by CE customers.

I'm going have to guess a little bit here.

But today, consumers who are Netflix subscribers can rent DVDs and then in the same subscription for the same place also watch movies on their PC.

What we would like to be able to do is make that watch movies extend to be able to watch movies on other devices.

So think of it as a different viewing option, not a different subscription or commercial option.

All under the subscription rubric?

As Barry said all under the subscription rubric.

Our focus as a brand is really around unlimited subscription entertainment.

Lloyd Walmsley at TWP.

You increased your subscriber guidance but maintained net income guidance.

Are you seeing something in terms of SAC or lower content cost making you comfortable you can increase subscriber growth and maintain profitability?

Second question, are you seeing lower online advertising prices or is it content driven?

Do you want to do the first part, Barry?

Sure.

The, let's see.

The model is more profitable than we were expecting it to be and that enables us to increase the growth and maintain the profitability.

It is also true that we are seeing better yields on the advertising we are doing and more organic growth as I mentioned in my comments for this call, all of which enables the economic model to deliver incremental sub growth without a deterioration in profitability.

I think, it's Reed here, an extension of that Lloyd, it is not fundamentally, it's not that we are getting lower CPMs materially.

It is that the CPMs we're buying are more effective with a better competitive climate and are increasing brand awareness and reputation.

From Tony Wible at Citigroup.

Any change in thoughts on kiosks?

Do you see them them as a greater threat or as a potential viable distribution model?

Tony, it is Reed.

I don't see them particularly viable for us or important to us.

They're viable, I think they will be around for a long time, and as I said in the last call, they hurt us a little bit and they help us a bunch in terms of triggering store closures because the kiosks focus really on the top 50 titles, they're very new release focused in their business.

So it is a net benefit to us we believe.

I would say absent of competitive threat to the economic well being of the business which we don't see.

We have the resources to make one large strategic investment.

We have chosen to make that investment in growing our ability to deliver content over the Internet to TV sets and other devices in lieu of reinvest doubling down in the physical world.

Okay.

Derek Brown from Cantor Fitzgerald, two questions.

First, is watch instantly usage incremental to disc usage or replacement of disc usage or can you tell?

Two, will BBI to go through with acquisition of Circuit City, how could you see this helping/hurting your business?

Derek, it is Reed.

On the incremental versus replacement, we can't tell at this point.

The types of consumers that are active users of instant watching are different types of users than others.

So there's no clean control group.

We are optimistic over time that there's only so many hours that people are going to watch content that there will be a substitution effect.

Second, in terms of Blockbuster and Circuit City, not sure what it means.

It is just too early to tell.

We will see what they decide to do.

From Ken Smith at Munder Capital.

Can you comment on average revenue per subscriber?

It appeared to be down sequentially quite a bit.

Ken, Barry.

Two comments.

One is I think sequentially, not so much.

About on par with prior quarters and, secondly, you may recall that there have have been sources of ancillary revenue from advertising and from an affiliate called Red Envelope and both those lines of business have pared back their revenues.

So it made the drop in ARPU look different than it would have looked if you were looking strictly at the ASP for the subscription business which was almost flat.

So, I am not concerned about it.

I would encourage you to not be either.

Said differently, no structural change in the mix by price point of new subscribers, and no structural changes other than improvement in churn in the installed base.

From Youssef Squali at Jefferies.

On gross margins, 31.7% is the lowest you have had in seven quarters.

Can you speak to why usage has increased?

Second question, Redbox is getting a lot of traction.

How do you see your value proposition versus theirs?.

Let Reed do Redbox and I will do usage.

Usage is actually down.

It is down for two reasons.

One because of the plan mix towards lower price points and lower caps, and then, secondly, because aging of the subscriber base.

So, and content costs in the aggregate have increased over what they have been, say, three years ago because of the investment we are making in the rights for Internet delivery.

So, this really gets back to the question that Derek has which is about switching, if any, substitution between users of Internet-delivered movies and TV content and DVDs.

And, this is a realtime experiment.

We are driving strong growth and profitability from the core DVD business and in effect, investors have a free option for the moment on our ability to grow the, the business of delivering movies over the Internet to television sets.

And we will only know over time how we need to fine tune that value proposition so that it works for consumers and works economically for Netflix.

So the short answer is usage is trending down, up seasonally as we expected, exactly what we expected, and increased in content spending around growth of the new initiative.

And, Youssef, you asked about Redbox and I think I answered that.

I think your question was probably just written before I did that.

Next is from Jim Friedland at Cowen.

Will you disclose percent of customers using instant watching target titles for year end on instant watching?

That's the first question.

The second is quarter-over-quarter growth in R&D was up a lot if Q1 this year and last year.

Is there anything seasonal about spending in R&D or should we expect steady increase each quarter in R&D?

Jim, overall, I would expect R&D pretty steady.

We do do the annual salary reviews at the end of Q4 Company-wide.

So maybe that's a trigger for it.

In terms of usage we have been very pleased with the adoption of the instant watching by our consumers, but we have chosen to not give out specific metrics on that.

Similarly with target titles.

We are up to 9,000 titles, up from I think it was 2,000 or 3,000 when we launched a year and a half ago.

So we have made great progress and we continue to make great progress.

Jim, I have been here almost nine years and I used to tease Reed that we never met an engineer he didn't want to hire.

Not having, that notwithstanding we have been pretty disciplined about the investment spending in R&D.

We are crawling at aggressively, but those investments we have recouped in longer subscriber lifetimes and increased subscriber profitability with reductions in retention by making the features and functionality on the Web site more attractive to consumers and better (inaudible) utilized our investment in the DVD library, one.

Two, we also are making an engineering investment associated with driving content to the Internet and some of the increase you are seeing reflects that R&D investment.

So the bulk of the investment spending to drive content across the Internet to TV sets and the like is content and the other part of that shows up in R&D.

All right.

Dan Ernst just had a clarification from Hudson.

I meant can you quantify the level of online content spend?

For competitive reasons, Dan, we are ducking that question.

Next question is from [Neil Warner] at Foxhill Capital.

What percentage of your customer base do you think will be renting Blu-ray by the end of the year?

Neil, I would guess it is still in the single digits.

Christmas there will be a lot of players sold.

So right at the end of the year it is a little bit of a fluctuation or improvement there, but probably single digits.

Okay.

Next question from Barton Crockett.

ARPU declined Q-over-Q, (inaudible) had said before mix change leveling out.

That not the case now, wouldn't seasonally the trend have been to increase?

I don't see that from here.

That's the first question.

The mix change, I don't think we have said in the past, Barton, that the mix change had leveled out.

Even when the mix change does level out because of differences in churn rates due to different subscriber ages of new subscribers and old subscribers there will tend to be a slight differential.

The majority of the change that you saw this quarter in ARPU is not due to revenue changes or pricing changes in the subscriber base.

It is due to add revenue and other revenue which in aggregate account for the decline in ARPU sequentially.

Next question, also from Barton, $4.3 million not in cash gain from sale of short-term investments.

What was that, was that contemplated in guidance?

It wasn't originally contemplated in guidance, but as the quarter progressed two things happened.

We increased, we decided to increase our investment in marketing spending above the levels that we had forecast when we gave guidance.

Secondly, we forecast as the economy improves and increase in interest rates.

From my perspective it was a good opportunity for us to realize a gain in our investment portfolio that might not be there in quarters to come.

So, we used the sale of the gain on the, in the investment portfolio to, in effect, fund some incremental investing in additional marketing and faster growth and to hold the P&L cost.

From Doug Anmuth at Lehman Brothers.

Is there any significant change in your view on digital spend for '08 versus what you saw three months ago?

Let's start there.

No, Doug.

I would say our spending plan is about what we thought it would be three months ago and it does continue to proceed nicely for us as we have seen the validators of the significant usage, and it is because we have a lot of online content that we have been able to get these great partnerships that we will be talking about later this year.

Next question also from Doug at Lehman.

Any change in competitive landscape in last three months, seeing Blockbuster be any more aggressive with spending?

Well, obviously Blockbuster has changed many times and they may change again.

But for the last three months there have been fairly minimal amounts of marketing from Blockbuster.

From Youssef Squali at Jefferies, and after this I think we can go to the operator to see if there are any final questions.

Last one that I have here.

From Youssef Squali, your GAAP net income for fiscal year '08 is unchanged, but your GAAP EPS is lower.

Why is that, is it option related?

Great question.

Thanks for asking.

Yes, it is.

We use a Treasury method and because the price of the underlying stock has increased, under the Treasury method it takes fewer options for a net exercise.

As a result, the number of outstanding shares is assumed to be greater which has resulted in, I think, it is a $0.01 decrease in the projections for EPS on the same GAAP net income.

Operator, can we open it back up or do you want me to continue reading questions?

We can open it back up.

(OPERATOR INSTRUCTIONS) We will pause for just a moment.

First, we will hear from Tony Wible with Citi.

Good afternoon.

I was hoping you guys could comment on if you have seen any change in some of the metrics, in some of the share gain subs, and some of the newer subs coming on, do they have any better or worse ARPU, margin or churn trends?

I know it is maybe a little early on the churn question, but any color would be helpful.

Tony, it is Reed.

No, we don't see any difference in the kind of character of the new subs in the share gain over Q1 than in prior quarters.

And what do you still feel is the best use of cash after you burned through the $150 million, roughly, that is remaining?

More buyback.

More buyback.

All right.

Thank you.

Next we will hear from Lloyd Walmsley, Thomas Weisel Partners.

Great.

I was wondering if you guys could comment on the landscape for digital content rights acquisition, and in particular, if you see any changes coming out of the new pay TV plans announced yesterday by Paramount, MGM and Lionsgate?

And then if you could perhaps as a follow-up to that just talk about how you have structured those deals in terms of fixed costs versus variable cost driven by usage?

Lloyd, it is Reed, obviously, there's a lot changing in terms of the specific new Viacom, MGM, Lionsgate initiative.

It is too early to tell what the impact of that will be in the marketplace, and then we contract for content, try to go get the best deal we can.

Sometimes that's fixed, sometimes it is pay-per-view, sometimes it's other mixed models.

We are pretty flexible on that in the search for a good deal.

Operator, I think we will take one last question if we have one, otherwise we will.

We will take one final question from Heath Terry, Credit Suisse.

Great.

Heath, take us home.

All right.

I was going to ask, the watch instantly customers that you have got, can you give us an idea of what kind of, if you are seeing any difference in the churn rate among those that are using watch instantly and what kind of penetration you are getting for the service among the subscriber base?

Heath, it is Reed, you know, we are really excited by the usage because you don't keep using something unless you are satisfied with it.

But, again, without a control group to identify what the compare the churn to the base of people who watch a lot of movies and watch content on their PC are different than other subscribers.

So we can't tell you kind of the direct retention impact.

But we can tell you that the usage has really impressed us, that there is many more people willing to watch a lot more content than we thought on the PCs, and we are looking forward to them expanding that to the television and the more that people interact with Netflix, the more they feel good about it -- consumers, and the more they tell their friends about it.

So very confident that it is a positive influence for us, but without the control group can't give you a perfect sense of the number, the size of that gap.

Great.

Thank you.

Well, thank you everyone for joining us on the call.

I'm sorry for those technical difficulties, but you all got your questions in very well, and we look forward to talking to you over the quarter and on our next call.

Thank you.

That does conclude today's Netflix conference.

We thank you all for joining us.