Netflix Inc (NFLX) 2008 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Netflix second quarter earnings 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 Deborah Crawford, Vice President of Investor Relations.

Please go ahead.

Thank you and good morning.

Welcome to Netflix's second 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 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 28th, 2008.

We released earnings for the second quarter at approximately 4:00 a.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 8:30 a.m.

Pacific time today.

Finally, as we noted in the press release we issued earlier this morning, we are going to conduct the question portion of the Q&A via email.

Please email your questions to me at dcrawford@netflix.com.

If you recall, last quarter technical difficulties forced us to take questions via email and Reed and Barry responded to them on the call.

As it happens, we received a lot of positive feedback last quarter, so we're going to try it again this quarter.

Please let us know what you think.

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

Thanks, Deborah and welcome, everyone.

Our goal with Netflix is very simple, to materially grow subscribers and EPS every year while expanding the unlimited enjoyment we offer with DVD by mail to also include unlimited internet streaming.

Once again, our quarterly results reflect strong progress towards this goal.

We delivered our lowest ever SAC as a public company, profits at the top end of our guidance, and ending subscribers above the midpoint of our guidance.

In addition, we made significant progress on our expansion into streaming with a launch of the Netflix player by Roku, the announcement of our X-Box partnership last week and our continued growth in the number of movies and TV episodes available to our subscribers for unlimited streaming.

We discussed at length our views on the market and how we are approaching it at our Investor Day about eight weeks ago.

In summary, we think that DVD by mail will continue to grow for five to 10 years, despite overall DVD rental flatness, as ecommerce continues to grow generally and as video store economics force more store closures.

As we expand more into streaming, we are improving our core consumer proposition of unlimited enjoyment for a low monthly fee by combining unlimited DVDs by mail with unlimited streaming.

We don't plan to enter the pay-per-view segment, where Apple, Amazon, Sony and others focus, or the ad supported segments where Hulu, YouTube and others compete.

Both of those segments will likely be substantial, but our subscription segment will also be large and will provide Netflix plenty of room for growth over the coming years.

In order to succeed broadly with streaming, we need it to be easy and inexpensive for consumers to watch internet video on their television screen.

Specifically, our goal is to have our streaming software integrated into Blu-ray players, game consoles, connected to DVD and stand-alone internet devices.

Our substantial streaming content, available to consumers on an unlimited viewing basis, makes it attractive for consumer electronics companies to integrate our streaming software, because it increases the attractiveness of their devices, and we promote their devices to our large subscriber base.

Our results to date with this approach have been excellent, starting with the launch of the Roku box in May.

This $99 box allows Netflix subscribers to instantly stream movies and TV episodes to their TVs.

It's been a huge hit with strong reviews, strong sales, and great subscriber satisfaction.

Roku purchasers are streaming video to their TVs and getting great value from the unlimited streaming portion of their Netflix membership.

In the future, Roku boxes will support other internet video content and migrate from being a Netflix only player to a general internet video player, which will increase Roku sales and therefore the number of TVs we can stream to.

We also have a technology partnership with LG Electronics, which we'll be discussing in more detail soon, one other similar partner not yet announced, and the X-Box partnership which we announced last week.

The X-Box partnership means that with Microsoft's late fall software update to over 10 million domestic X-Box 360s, Netflix members can stream movies and TV episodes to their TVs, as long as they are also X-Box LIVE Gold members.

As with our streaming to the Roku box and to the PC, there is no extra Netflix charge for the unlimited streaming.

While our strategy is to achieve ubiquity, we were willing to do an exclusive partnership in the game console segment because of the very large installed base of 10 million households that X-Box has developed.

We believe this will be our only exclusive deal in any segment.

Since the X-Box software update is scheduled for late fall, its impact during this calendar year is unclear.

While this functionality will certainly increase streaming amongst our current subscribers, we and Microsoft have yet to really understand how much it will drive additional LIVE Gold subscriptions, new console sales, and how much it will drive additional Netflix subscriptions.

As we both learn more about the attractiveness of this joint functionality with consumers, we will use that information to determine the extent of our promotional activities over the next year.

In the best case, substantial cross-promotion in 2009 will make economic sense for both parties in terms of increased efficient growth.

Between the large and growing X-Box installed base, the strong sales of Roku boxes and the anticipated sales of the Netflix ready LG device, we are off to a very solid start.

As I mentioned earlier, as we increased the number of connected TVs, we are also increasing the content we are making available.

In fact, over the last 18 months we've grown our number of choices from 2,000 to over 12,000, and we plan to continue to increase the amount of content available.

This planned investment is already factored into our earnings guidance.

Shifting to the competitive climate, Blockbuster remained active in DVD by mail over the quarter.

Our guidance for the year assumes that they continued to stay active at similar levels for the rest of the year.

The rise of DVD rental kiosks in supermarkets, while new competition for us in the short term, is a bigger competitor for new release focused video stores and should accelerate store closures over the coming years.

In addition, the rise of DVD rental kiosks shows that the DVD franchise is still very strong with mainstream consumers.

In the long term, we think it is likely that DVD by mail and DVD rental kiosks will continue to increase their share of the DVD rental market at the expense of stores.

To close, our goal is to materially increase subscribers and EPS every year as we expand into streaming and this quarter we continued to make excellent progress towards that goal.

Thank you and now I would like to turn the call over to Barry for a more detailed discussion of our Q2 results.

Thank you, Reed and good morning, everyone.

My remarks will cover three areas, our Q2 performance, our guidance for the remainder of the year, and an update on the share repurchase program we announced in March.

Like last quarter, our Q2 financial performance was strong, with revenue above the midpoint of guidance and net income and EPS at the high end of the range of our guidance.

This year's second quarter followed a well-established seasonal pattern of slower subscriber growth and increased profitability, which we spoke about on last quarter's earnings call.

Seasonally slower subscriber growth was accompanied by record high operating profit of $33.5 million, when you exclude one-time items from prior year comparisons, and strong free cash flow of $12.5 million.

Free cash flow nearly tripled sequentially and I'll say more about that in a moment, in spite of our growing investment in content rights to distribute internet-delivered movies and TV content.

Gross margin was 10 basis points higher than it was in Q1, as expected.

Looking at the components of cost as a percent of revenue, we see that a small increase in content spending was offset by an equally small decline in both fulfillment and shipping and packaging expense, despite the postal rate increase in May.

We expect gross margin to be up slightly in Q3 and Q4, despite our ongoing investments in internet delivered movies and TV content.

Excuse me.

With the seasonal decline in subscriber acquisition in Q2, our marketing expense declined by $15 million or 27% sequentially to just under 10% of revenue.

As a percent of revenue, this represents the lowest quarterly marketing spend in our history as a public company.

In Q2 we expensed $40.1 million on marketing.

That's $5.2 million less than we expensed in Q2 of last year or about an 11% decrease in marketing expense.

What's remarkable about the lower spending is that gross subscriber additions continue to grow anyway on a year-over-year basis.

SAC declined again this quarter to just under $29, the lowest SAC has ever been since taking the Company public in 2002.

This seasonal decline in marketing spending was the primary contributor to the increase in operating income in the quarter.

A second large contributor to the increased profitability in Q2 was the expected decline in our effective tax rate from 41% to 26% in Q2.

This was something we discussed with you on last quarter's earnings call.

The tax rate decline relates to a one-time R&D tax credit and we expect a return to 41% into Q3 and Q4.

Free cash flow of $12.5 million in Q2 nearly doubled from a year ago and nearly tripled sequentially.

Higher net income was the primary contributor to the sequential growth in free cash flow, coupled with a $10 million sequential decline in content spending.

These sources of cash were offset by a decline in AP and accrued expenses of $11 million.

On a year-over-year basis, there were three primary contributors to the growth in free cash flow.

First, the increase in depreciation on PP&E and the amortization of content.

Second, the growth in AP plus accrued expenses, net of excess tax benefits on stock comp.

And lastly, the growth in long-term income taxes payable, related to the R&D tax credit.

Although this is the second consecutive quarter of exceptionally strong free cash flow growth, I don't expect these hyper growth rates of 100%-plus to continue through in Q3 and Q4.

When the dust settles and we look back on the year's results, year-over-year growth and free cash flow for the full year of 35% to 45% seems possible.

Today's earnings release includes subscriber revenue net income and the EPS guidance for the third and fourth quarters.

Today, we reaffirmed our year-end subscriber and net income guidance, tightened our full year revenue guidance, and raised our guidance for EPS, reflecting our expectations for a lower weighted average share count by year end.

It's worth mentioning that we expect year-over-year revenue growth to accelerate in Q3 and again in Q4 as the effects of last year's Q3 price decrease slip away for comparison purposes.

And by the way, we saw year-over-year revenue growth begin to accelerate this past quarter from 7% in Q1 to 11% in Q2, the first acceleration in the last seven quarters.

With regard to our share count, I'd like to talk briefly about the status of our share repurchase program.

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

All $150 million is currently available to buy back shares.

No shares were repurchased last quarter because we closed the trading window pending the Microsoft announcement on July 14th.

If the trading program had been open during the quarter, we would have been buyers of Netflix stock at these prices.

That concludes my prepared remarks.

Now it's time to answer your questions and, as Deborah mentioned at the beginning of our call, we would like you to email your questions to dcrawford@netflix.com as we did last quarter.

Deborah will read the questions out load and Reed and I will do our best to answer them.

As Deborah mentioned, we received lots of positive feedback on this approach last quarter and were able to answer more questions from more investors than we typically get to.

So we thought we'd try this format again.

So Deborah, over to you for the first question.

Thank you.

The first question is from Barton Crockett at JP Morgan.

First question, what drove down stocks, lower pricing of media i.e.

lower Yahoo!

CPMs or was advertising simply more effective?

Could that be a function of better word of mouth, impact of service cuts or greater consumer interest, perhaps due to higher gas prices?

It's Reed, Barton.

I don't think it's the outside advertising climate which hasn't shifted materially for us.

It's mostly that we are spending less marketing as a percentage of revenue, so we're trying to push the market less hard than we have in the past.

Second, better competitive climate than last year and then third, we made a big investment with lower prices last year, last Q3, we lowered our prices and we think of lowering prices as a marketing investment, although it's not reflected in fact.

So those three factors have helped us to achieve this very efficient sub $30 SAC.

Also, talk about the expected subscriber and economic impact of the X-Box deal.

Is there one other major announcement still to come with another partner this year?

Barton, I answered that question.

You sent it in just before I read the script, but I think I've covered that.

That this year, hard to tell because it's a late fall update.

Next year we're optimistic that the cross-promotions will be economically efficient for both parties.

Shutting down red envelope, talk about why.

On red envelope, we did some experiments, tried to figure out an economic model that was scalable and sensible, unable to do that.

We decided to close it down and all the closure costs are baked into our current guidance.

Are DVD trends being impacted by gas prices or the economy?

We don't comment on usage.

Next set of questions from Doug Anmuth at Lehman Brothers.

The fact that it's lowest ever for Netflix as a public company, why not push the marketing a little further for more subs ahead of the back half?

That's an interesting question and something we debate, which is the balance of really earnings versus growth.

And certainly there are good arguments that we could have taken, generated less earnings and pushed more into growth.

But at the end of the day, we think it's better to stick to our earnings targets, despite these great opportunities.

And it does give us substantial room for growth so I don't feel like we're making bad choices, but it is a very attractive opportunity when SAC is as low as it is.

Is it becoming more competitive to partner with CE manufacturers now that Amazon has turned to streaming, i.e., and signed a deal with Sony and possibly others?

Well, Amazon's pay-per-view stream service is very nicely implemented and I think what we're going to see is them also emerging to various devices.

Again, that's really the pay-per-view new release focus content and in many ways you need that, you need our subscription service and you need ad supported content from, say, Hulu and NBC.com and ABC.com and others to really form a total internet video solution on these devices.

So I don't think it's competing against each other.

We're not trying to block them.

I don't know of them trying to block us.

These are really different segments, the ad supported, the pay-per-view segment and the subscription segment.

Finally, can you provide more color on digital usage?

What percentage of subscriber bases stream are digital users turning less and using fewer discs?

What percentage of total usage is digital?

Like eight weeks ago, we haven't given any color on the specific trends around watching, it's just too early to tell and we don't have a control group that doesn't get instant watching.

So there's really no easy way for us to say anything conclusively.

We're very encouraged by the usage, people are watching, are instant watching in significantly and growing numbers.

That's very exciting.

But at this point we don't have any specific numbers to provide.

From Tony Wible of CitiGroup.

Can you speak to if you have seen higher DVD consumption trends in your core DVD subscriber base over the past quarter versus last year to adjust for seasonality?

Tony, thanks for the question.

Again, we're not commenting on usage specifically.

This is from Michael Olson at Piper Jaffray.

Any more details you can provide on potential pricing changes for Blu-ray or Watch Instantly?

Is there a threshold of Blu-ray or Watch Instantly subscribers that you are looking to reach before raising prices or what is the trigger for those potential changes?

We'll be commencing the testing of Blu-ray price increases very shortly.

Depending on the test results of those, then we'll move forward with implementing.

Next question also from Michael Olson.

What should we expect for gross margin going forward?

Is there any potential to get back to the 33% to 34% level of '07 or should we expect it to be kept at 32% in the near term?

What is keeping the ceiling on gross margin?

Well, as I said in my remarks, we expect gross margin will increase next quarter, which is a change from our expectations in Q1.

And I expect it to be up in Q4 as compared with the current quarter, although not quite as strong as it was in Q3.

As relates to the question around how high can gross margin go, answer it this way.

If gross margin rose to 35% or 36%, it would not necessarily mean that the business is more profitable.

There's a relationship that we've continued to explore during our history as a public company between customer SAT and gross margin.

And in some respects, they're inversely related and since customer SAT drives at least indirectly SAC, and retention which drives lifetime value, sometimes the business is more profitable with lower SAC, higher retention, lower churn, higher lifetime value and lower gross margin.

And we learned that experience when we launched Hubs and we're exploring those interrelationships again with the launch of the Watch Now service.

So it remains to be seen what will happen with gross margins over time.

So at least through year end, we expect some improvement.

What the implications are for '09 and '10, it depends on the interrelationship between lifetime value, SAC and gross margin, as we expand the number of titles available for internet downloading and as the number of devices available for people to view that content on their TV sets increases.

Next question is from Lloyd Walmsley at Thomas Weisel Partners.

As new subscribers come in, do you have any intelligence on where they are coming from?

Do you think a weak economy may be driving subscribers off pay TV to Netflix?

Do new subscribers tend to use the service more and are your most profitable subscribers, those who use the service very little, leaving the service as they cut costs?

Lloyd, I don't see anything related to the depressing economic picture that we face, which is tempting to put a lot of -- to read the tea leaves about how it's affecting Netflix.

But we're not really able to tell is that why we're going so strongly or would we have been growing even more strongly if the economy had been strong.

In terms of where subs are coming from, no real changes.

New subscribers do use more than older subscribers.

But that's been true for 10 years for us.

So no material change there.

Overall, the wonderful thing about the Netflix business is we appear to be substantially unaffected by this significant economic negative climate.

So we're very happy about that.

Second question, what percentage of the subscriber base is using Blu-ray?

Blu-ray usage has continued to be very low -- low single digits.

It's something that has promise over the next couple years, particularly through this Christmas season and beyond, if player prices fall significantly.

This will be the first Christmas coming up where there is dedicated players that are at more aggressive prices.

Two questions from Jim Friedland at Cowen and Company.

As digital demand ramps, what will the impact be on your infrastructure needs?

How should we think about CapEx growth over the next couple of years?

In terms of CapEx for digital delivery, very little impact.

Most of that delivery infrastructure is through third party CDMs.

So no particular connection there.

Second question.

How long does the exclusivity on the X-Box deal last?

We haven't commented on the particulars of the duration.

Another question from Michael Olson at Piper.

Why was other income so low in this quarter and what should we expect it to be the rest of this year?

Well, Michael, follow up if I don't address your question specifically.

There's the combination of other interests -- it's mostly interest rates are down, long story short.

Questions from Andy Hargreaves at Pacific Crest Securities.

Why was the content library on the balance sheet down so much Q over Q?

Sorry, why was the content library on the balance sheet down so much Q over Q?

Well, we spent less on new content and it was a relatively weak new release box office and -- one.

Two, the two components that -- two, content acquisition, we buy some content outright that affects CapEx.

We also rev share content with studios.

So sometimes there's switching of -- from a CapEx versus a P&L perspective, depending on which particular studio is in rev share and which is not and which particular studio is hot from a new box office perspective and who is not.

So to be explicit, if a particular studio has a rev share agreement with Netflix and that studio has a number of new release titles which are hot and that new content is being acquired in the form of rev share, those expenses will show up in the P&L and the cost of revenues.

And conversely if there are a number of new titles from a studio which are popular and we're buying them outright, then that will show up in the statement of cash flows and content acquisition.

Next question, direction of disc usage.

I guess probably all these questions piled up.

Stick with the same perspective of us not commenting specifically on usage.

Will there be meaningful cost savings from the end of red envelope?

No.

Next question is from Derek Brown at Cantor.

Recent article indicated the number of Roku units sold at about 100,000.

Can you confirm that figure or say whether it's close?

Can you provide any type of color on the behavior changes i.e.

more digital, less DVD of Roku owning subscribers?

No, we're not giving any comment on number of Roku sold.

What was the second question?

Behavior.

Roku.

Box owners.

It's something we're starting to look at, but we have to be careful about overreading it, because the first people to buy Roku boxes of course are not typical people.

So they're not necessarily representative of what we're going to see as that market expands.

So while we're looking at it, we don't think it's particularly significant.

Okay.

Next question is from Brian Fitzgerald at B of A Securities.

With the previous announcement of the streaming service, Roku and LG, the service is naturally governed as there is a delay as this hardware gets deployed, with the X-Box being deployed at 12 million X-Box live subscriptions potentially at once.

We have seen you doing full (inaudible) the acceptance traction on the X-Box.

Can you give us a sense of the traction or speed of adoption you expect on the X-Box and any potential expenses around the big inflection in usage?

Yes, you're right, that there's a real step function there as Microsoft releases their update to the X-Box in the late fall.

We think we're well-prepared for that, both in terms of the loads on our various servers and in terms of our financials and that's all built into our guidance.

You used to provide us with number of streams to date and we were hoping you could give us some kind of update on this.

Yes, very early on we were disclosing number of streams.

But we haven't -- what we tried to give investors some awareness of it, that the content investment is really to drive the number of partnerships and the number of seats of internet connected TVs and that's really the point of this aggressive early investment in content so that's why we're talking about the various deals that are signed and in process.

And that's really the payback on this big content investment.

Last question from B of A.

Amazon streaming VOD has a library of 40,000 versus Netflix's 12,000 in the Watch Now library.

Can you explain to us what the major difference is between online pay-per-use 40,000 versus an online subscription model at 10,000 that would allow for one library to be so large relative to the other?

I don't have a good answer for you on that yet.

It's something we'll look at as we get to use the Amazon 40,000 more.

Obviously YouTube has 400 million titles, but you have to think about the weight of the titles in some context.

So a straight title count isn't probably a very interesting way to look at these things.

The way we look at it for the Netflix service is providing enough content that subscribers are very excited about staying as a Netflix subscriber.

So that's the basic subscription calculus.

Again, we see the Amazon, Apple, pay-per-view model, the Hulu, ABC advertising supported model and the Netflix subscription model as three different segments of the overall internet video market.

Having said that, I think the 40,000 for Amazon is an aspirational number that's been understood to be the current title count.

I think actually the current title count is in the 5,000 range.

From Michael Olson at Piper.

Is there any share repurchase factored into the guidance for the second half of '08 EPS?

Yes, I mentioned -- probably Michael sent that in before my comments -- but we expect the weighted average share count to decline through the end of the year related to share repurchase.

From Larry Witt at Morningstar.

With Blockbuster on the sidelines for now, why not hold down the accelerator on marketing to gain more share?

Larry, it's Reed.

I think I covered that just a moment ago, which is it's tempting but instead of doing that we are preserving our earnings guidance and it's one of those many balances of earnings and growth.

This is Barry.

Second point Reed previously made is that there are two ways to invest in growth.

One is direct marketing spending, the other is the subsidy of lower prices and so in the third quarter last year we made a significant investment in incremental growth by lowering the pricing and only partially paying for it with reductions in marketing spending.

So while we're all very enthusiastic about the reductions in marketing spending, we continue to cross-subsidize the business, if you will, with price reductions from a year ago.

From Ken Smith at (inaudible).

What was the Bay Area household penetration and rest of country penetration?

The Bay Area penetration was up 20 basis points to 18.8% from 18.6% and rest of country was up 20 basis points from 7% to 7.2% in the end of Q2.

From Michael Pachter at Wedbush.

Microsoft told us that in surveying its X-Box live membership it felt that just under 1 million of its customers were Netflix customers.

Have you conducted a similar survey?

No, we don't have access to the Microsoft user base, so are unable to do that survey, Michael.

And whatever the current numbers are, it's more interesting thinking about the potential, both as Microsoft markets the Netflix service to get LIVE Gold upgrades and also to sell consoles against their competitors and as we advertise the X-Box console as a way to get instant streaming.

So we're mostly excited not about the current installed base but about the future overlap that we can both generate.

From Larry Witt at Morningstar.

What are your expectations for future capital expenditures on technology regarding the Watch Now service?

And do you plan on providing better quality streaming in the future and what are the implications of additional spending on this?

Yes, we're continuing to improve the quality of the streaming but not using our own capital.

Mostly it's through better use of the CDM market, better integration with the CDMs, better monitoring, so that's how we're achieving that.

So it's a straight P&L model as opposed to anything capitalized or on the balance sheet.

From Derek Brown at Cantor Fitzgerald.

Can you help us understand the framework of the digital content deals you are striking?

Are they pure revenue share?

Are there substantial upfront costs you are incurring for first time access to the content?

Derek, Barry.

We are trying to be purposely vague in responding to that question, which I know continues to be frustrating for you.

The content deals in some respects at a high level are similar to DVD, meaning there's some revenue sharing and there's some fixed fee payment.

Now, if you -- so let's see.

From a P&L perspective, if the service were to grow at, say, twice the rate of adoption that we are projecting, the obvious concern on the part of investors and the management team would be that P&L expenses would run away from us and we would badly miss our guidance.

And we've been mindful of that in our negotiations with studios for content deals and I don't anticipate that happening.

From Lloyd Walmsley at Thomas Weisel Partners.

Your competitors have been paying about 50% rev share splits in physical rentals.

What are you seeing from studios in terms of increasing splits in rev share?

How often are rev share terms negotiated with studios?

If you have been seeing increasing rev share costs, how has this impacted gross margins?

If not, how might this going forward if pricing were to increase for you in rev share?

We haven't seen any material change in the rev share climate for our purchasing so we're continuing to build our library and our relationships with studios.

So no material change there.

This is Barry.

As compared with the brick and mortar world, we have a much higher percentage of content that's purchased outright than rev share, because we have the luxury from a free cash flow perspective of being able to acquire the content outright.

So we're -- if that phenomenon were to emerge in our world, then probably it would have less of an impact on P&L than it would be if we had a very high percentage of content acquired on rev share.

I believe this is our final question.

If anybody has additional questions please e-mail them to dcrawford@netflix.com.

The question I have is from Daniel Leonard.

Can you speak further on share buyback program and when you can initiate purchases again?

Well, we can initiate purchases when the window opens.

The window will open on Monday absent a particular transaction that would require the Company for legal reasons to, because it possesses material non-public information, to not participate in the market and, if we were to possess that information, of course I wouldn't comment on it.

But I expect that the window will open Monday.

Another question from Barton Crockett at JP Morgan.

Blockbuster is showing a beta version of new download service Movie Link.

Can you talk about how that compares to your service?

Barton, I haven't used the new Blockbuster service.

So I'm just going by the press reports and from being a customer of Movie Link and Movie Link is a pay-per-view model, so it competes with Amazon or Apple in that segment.

So I imagine they've done a good job.

Movie Link had been well-implemented before.

So we look at it and say it's another pay-per-view service and that's fine.

It's just not in our segment.

Final question from Ryan Hunter.

You mentioned DVD kiosks having a competitive impact on DVD stores.

How do you see this model impacting Netflix?

Ryan, something that we've looked at extensively, using the areas of the country that have high kiosk penetrations, would be where and how it affects Netflix and we haven't yet been able to detect any change in those areas.

So we're relatively comfortable that as kiosks grow, it doesn't present a direct threat to our business.

We'll continue to watch that.

It's still early in the DVD rental kiosk market, but obviously the secondary benefit will come later which is with accelerated store closures which will help us.

I believe that's the last question.

Thank you everybody.

With that, let me thank everyone for joining us for this early morning call and look forward to talking to you all next quarter.