Netflix Q1 Digest and Conference Call: What You Need to Know

Netflix (Nasdaq: NFLX) reported first-quarter earnings last week and hosted an investor call.

Here's a Foolish digest for current or prospective Netflix investors.

Quick financial checkup

Sentiment change?

Data from Motley Fool CAPS. Rating out of a possible five stars.

Further Netflix news and analysis:

• Earnings analysis: The One Thing Netflix Is Doing Wrong
• Where to from here? Netflix at $100: Is It Too Late Now? (video)
• Just the facts: Netflix 1Q Profit Rises With 17 Million More Subscribers (from the AP)

What follows is a transcription of Netflix's earnings call:

Operator: Good evening everyone and welcome to the Netflix First Quarter 2010 Earnings Q&A Session. 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.

Deborah Crawford, Vice President of Investor Relations: Thank you and good afternoon. Welcome to the Netflix First Quarter 2010 Earnings Q&A Session. We released earnings of the first quarter at approximately 1:05 p.m. Pacific time today. The earnings press release management's commentary on the quarter results and the web cast of this Q&A session are all available on the company's investor relations website at ir.netflix.com. Like last quarter this call will consist solely of Q&A and we are going to conduct the Q&A via email. Please email your questions to [email protected] and please note that this is a new email address from previous quarters. We may 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 fillings with the Securities and Exchange Commission including our annual report on Form10-K filed with the commission on February 27, 2010. A rebroadcast of this Q&A session will be available on the Netflix website after 6 pm Pacific time today. Before turning to the Q&A, I would like to turn the call over to Reed for opening remarks.

Reed Hastings, Founder, Chairman and CEO: Thank you Deborah and welcome everyone to the Netflix Q&A session. Q1 was another outstanding quarter. We saw records, net stock additions, and the lowest SAC and churn in our history with EPS proved 59% year over year. At the same time, the percentage of our subscribers streaming movies and TV episodes in the last 90 days grew to 55%. This was driven by the progress we have made in enhancing our streaming content offering, expanding breadths of Netflix-enabled devices, and improving the user interface. As the guidance for the remainder of 2010 indicates we expect our momentum to continue. So with that let us go over the questions.

Deborah: Great. The first question is from Steve Frankel from Brigantine Advisors. Can you share any insights into the viewing cabinets of watch instantly customers? How many times per month does a typical user stream? Have you seen any material impact on disk usage? Is the viewing skewed materially to TV content?

Reed: Steven, it is Reed here. Think of the distribution of instant watching users like any one distribution. There are some people who barely use it and there are some who use a lot. You know it is a pretty typical normal distribution. TV and movies, it is more toward TV than DVD, but movies are still the majority. We are continuing to strengthen the TV side.

Barry McCarthy, CFO: As per the last part related to the usage. In on the usage question it appears that we are receiving some substitution on DVD realm for streaming.

Deborah: He had a second question, what is the largest competitive threat facing Netflix today key off sender digital VOD or traditional cable VOD?

Reed: Well Steven there are a lot of competitive threats and it is always hard to figure out which the biggest ones are. Certainly cable, satellite, telco, MSL are just improving -- their products are the biggest ones. The better more on demand, more HDTV everywhere but continuing to improve that, and that is a competitor for a time at least and there is potential emergence of direct competitors. We refer to Hulu and we will see what they will do and potentially others over time. TV shows and movies are a very broad competitive sector but the upside is a very big market.

Deborah: Next question is from from Jefferies & Company. What do you believe is the likely impact of the postal service going from the 6-day delivery to 5 days on your DVD by now?

Reed: This is Reed here. We are not particularly concerned as our screening grows we will be less and less sensitive to, you know, the particular postal variations. The sooner they are talking about it actually take effect in the middle of next year, so it is not a good thing for us. We hope they hold off as long as possible, but we are also cognizant that that the total help of the USPS is at stake, and that they may need to make changes that they need to make.

Deborah: He had a second question. What kind of adoption are you thinking on the Wii platform since its launch? Would the cost be higher or lower than your average?

Barry: On the Wii, we are happy with the first two weeks here. The application is working great. We are shipping more disks every day. So we couldn't be more happy on it and there is no particular cost difference from any of our other platforms.

Deborah: Next question is from Mark Mahaney from Citigroup. Can you provide any more color on the HBO deal mentioned in the transcript? How broad is this deal?

Reed: Mark, it is Reed. The 28-day deal or the HBO deal is in reference to our DVD and Blu-Ray purchasing that is we figured out a 28-day style deal with them like we have with Warner Brothers.

Deborah: Second question, do you have any indication yet on whether the 28-day window is causing any satisfaction problems with your customers?

Reed: Yes our indication is our record low churn. You know we continue to improve our service by taking all of the savings from the 28-day DVD, and pouring it into more streaming and you see the net benefit in our record low churn.

Deborah: Next question is from Ryan Hunter at Wedge Partners. As instant watch viewing increases are you starting to see subscribers change from multi-out to single-out subscriptions? If so will lower operating costs from streaming also set the churn and what horizon should we think about this leveling out?

Reed: You see Ryan it is not so much that people who have been with us for a couple of years on 2 out of 3 switch down. There is a little bit of that but it is not material. It is mostly that as we grow, the new people coming in are differentially choosing our one out $9 a month plan. So that is where you get the majority of the ASB effect from. We are happy with the margin structure that generates for us and on the earning stream. So I hope that answers your question.

Barry: I feel that on the switching migration by price point and roughly 1% of the subs a month migrates down, roughly 1% migrates up like 1.1 or 1.2, and on balance for the last quarter, we had 4,500 more subs migrate up and down. So as far as Reed said it happens a little bit on balance more than up and that remains the current trend in the business, so it just isn't a dominant single behavior.

Deborah: He had a second question. Vitamin Water recently aired an ad that mentioned searching Netflix for "a guilty pleasure marathon." Is there a form of relationship, or is this an example of Netflix becoming more a part of social vernacular?

Reed: The latter, Ryan.

Deborah: Next question is from David Miller at Garrison Company. Of the $200 million in leverage which was forced late last year, can you say what portion has gone toward streaming rights, what portion has gone toward stock buybacks, and what portion has gone toward working capital?

Barry: The question refers to the $200 million debt that we closed in November last year. As you know from Q4 and Q1 results, cash flow from operations is positive and free cash flow has been positive. So all of the working capital needs of the business are self-funding and cash flow from operations includes all of the expenses and investments in contract related to the streaming and so that has been self-funding. So by default, all the proceeds have gone for other stock buyback that would replenish cash on the balance sheet or in the combination of both.

Deborah: The next question is from Doug Annis from Berkley Capital. Why is it marketing expensive content in the second half when you really have the opportunity to grow the subscriber base and can clearly fund the content spent other ways?

Reed: Doug, it is a legitimate question. I think probably either one would get us a great growth. I just want to point out that when we invest in streaming content, that also attracts more subscribers because it improves the service. So they are both vehicles for growth and you know we never make judgment calls between the two, but on the margin, the results are not sensitive to it -- that is you know if $10 or $15 million one way or the other, we would get really the same growth. So think of it as you know we are continuing invest adequately in marketing and generously in terms of the streaming content which is the strategy decision.

Barry: As we are approaching, the effect of the streaming is to improve the global value of service by year-end, and that serves the long-term strategic objectives of improving the value of the proposition which increases long-term value by lowering churn and improving word-of-mouth, which lowers SAC and the combination you see in play in the most recent quarter, and in the prior quarter.

Deborah: Second question from Doug. What is your view of the iPad: more of a new subscriber driver, or another device for subscribers that will improve the value proposition reduce churn, etc.?

Reed: A little of both, Doug. I mean it is a great device and will grow over time in both its impact and usage, and as we mentioned it will expand under the iPhone also -- of course that is a much bigger install base but a smaller screen. You know both of those will be good. I would say both will relatively have a small part of video viewing, and most of our focus is on television, either directly with WiFi TV or through the Blu-ray player or through the video game console --but it is easy not to support mobile so we are doing that also.

Deborah: Great. The next question is from Tony Wible of Janney Montgomery Scott. When does the Star contract come up for renewal?

Reed: Tony, this is Reed. We don't talk details of any of the other contracts but we are not overly dependent on any single piece of content. We are continuing to grow our total content, and we are confident that we will be able to continue to grow that content this year, next year, and going forward as we are able to invest more money in it which will happen.

Deborah: The next couple of questions are from Mark Harding, Maxim Group. First, could you comment on the linearity of subscriber ads during the quarter?

Barry: Well let's see, Mark. Historically what we have seen is seasonality effects in calendar Q1 and calendar Q4 with growth, just after the Christmas holiday season with back unloaded in Q4 and front unloaded in Q1, and then growth during Q2 was relatively back unloaded and during Q3 pretty linear across the quarter. Our growth pattern this quarter was less pronounced with growth in partners and in streaming. And with the launch of Wii, there is a nontraditional growth pattern during the second quarter and incremental marking of spending around that growth as well.

Deborah: Second question, can you update us on the split between the new releases and catalogue DVDs and can you provide any similar matrix for streaming perhaps newer releases through your Star relationship versus older title?

Reed: Mark, on DVD we haven't seen any material changes in years. So that has been a pretty consistent story and on streaming, we haven't provided any color on the breakout between different types of content or ages.

Deborah: The next question is Van Gogh from Battle Road Research. Can a company share the number of subscribers through a utilizing streaming for virtually all of their next consumption? If not, can you share that percentage in the future?

Reed: It is a pretty small number and almost everybody watches DVD also of our subscriber base and we don't have any plans to break that out but what we are focused on is driving up the percentage of people who do some streaming. We will see that at the key network, which is why we developed and are continuing to update everyone on it.

Deborah: Next question is from Wayne Chang at Canaccord Adams. Could you speak a little more extensively concerning the levels of activation you have seen on all the various connective devices be it television, setup boxes, and portable devices such as the iPad?

Barry: It is not particularly in terms of the level of activation that we are going to talk about, but probably underlining the question is trying to get the insight into how people are using the service and a key insight for you is that there is a significant amount of people who are hooking or watching on a PC and are watching with a PC hooked to a TV which to us looks like a PC. So don't think about it as only thing that matters is the Xbox or the PS3. These are really very broad usage patterns across a whole lot of devices -- even in a given single household you will have people accessing the networks from multiple devices, and that is part of the strength that our service in really being an Internet video service beyond all the devices that the Internet is on, and have the consumers think about it as an Internet service across all of their devices.

Deborah: Next question is from Melinda Davies from Susquehanna Financial Group. A question about the new distribution deal with Warner Brothers, now that you have The Blind Side for example you have enough to fill the demands for DVDs. Our demand sense is The Blind Side 28 days after the DVD release similar to what you have been seeing for new releases of this type in the past. We are trying to understand if there are "pent-up demand" from network subscribers, or are network subscribers shifting to pay-per-view or are buying DVDs for the new releases, and using networks for other contents like ordering movies, TV shows, etc.

Reed: Melinda, there is a little bit that you will accept. There are people, who because of the 28 days, have turned to buying DVDs, especially because it is widely promoted in Wal-Mart and other places. There are some who take the pay-per-view because Warner Brothers has aggressive pay-per-view licensing and that is really the intent of the deal. In terms of the backlog, once it comes to the 28 days we try to target that we have enough DVDs to clear that backlog pretty quickly. A little bit of guesswork based on that, but we are still learning together with Warner Brothers on how to protect that, but that is the goal and intent.

Deborah: Great. The next question is from Ralph Schackart at William Blair. Why is Netflix committed in staying out of 40 billion transaction based pay-per-view market, if we include DVD rental and sales? Why wouldn't content owners want you to sell new releases with the network's strong grant and digital distribution channel, if there will be multiple digital fronts going forward?

Barry: You know, that is an interesting question. I would say at times content owners have wanted us to do that. I would say we don't see how we add much value in that. That is, you know when we buy DVDs, we buy them from Wal-Mart as consumers, from Wal-Mart or Amazon because you know they do a great job out there and that is what their main focus is, and our focus is on subscription, and it is hard and takes a lot of work. So that is probably the main reason we don't do, for example, selling the DVDs. In terms of pay-per-view, then it is a very specific thing which is … for example, Xbox has, and has had for years, a big pay-per view business -- and if we also had pay-per-view as part of our service, it would have been a lot harder to get distribution on the Xbox. Similarly with PS3 and then of course you see now with Wal-Mart entering the pay-per view market online with Vudu. That many of those firms want to go after that business, and so it is really much smarter for us to think to be out of that and not in a position of conflict and just to be focused on our subscription business.

Deborah: The next question is from Edward Williams at BMO Capital Market. In terms of the iPad act how does it affect your view of the mobile market for watching instantly?

Reed: I think it doesn't change Edward, but as I said a few minutes ago that we look at mobile after video viewing as a nice extra because it is pretty easy, as opposed to fundamental and really TV-based and laptop-based screens as the sort of primary screens that we are focused on.

Deborah: The second question. How much of your share buyback program is left and on top of that another modeling question what do we expect of tax rate in 2010?

Barry: Well the second part of the answer is probably 41% in tax rate and of the level of user response to question of buyback program, you should imagine that if we exhaust the current buyback authorization that there will be additional authorization then you should expect us to be active in repurchasing stock.

Deborah: The next question is from Jason and company. As you begin to acquire contents for international streaming, would you expect the subscriber economics to be different from the US business and how could this impact margin?

Reed: Jason, we will be able to talk more about international at the end of the year. In our guidance built in we have planned the modest expenditures we have planned for this year.

Deborah: A question from Steven Frankel from Brigantine Advisors. Is the increase in stock-based compensation that we find in Q1 a level that will be sustained throughout the year?

Barry: Probably so, yes. The new employee hiring during the year and the thing that should give you comfort is likely to be true is that it was relatively flat, plus or minus a couple of $100,000 last year and the year before that. So the big drivers of incremental expanse will be increase volatility on both implied and natural and employee growth.

Reed: We are on the calendar year of review cycles. So generally we are stable during the year and then on the shift over the calendar year boundary.

Deborah: The next set of questions are from Scott Davis from Morgan Stanley. With regards to growth margin, the recent week coupons you sent out offering 10% off to next monthly billed users to install instantly on their week, lead us to believe that streaming users are materially higher margin than non-streaming users given they watch less DVDs. Can you give us any idea of the margin difference between streaming and non-streaming users?

Barry: Scott, we are not commenting on gross margin for streamers versus non-streamers. On high level you are right that the often streamers shift away from DVD toward streaming. It could be an accelerant gross margin, but you should also remember that we have explicitly said that all things will not be equal, and to the extent that there is more profit in the business to just reinvest the profit in improving the user experience. So in that way margins is the managed outcome, and our objective is to take what would have been higher margins, and reinvest in the business in order to drive faster subscriber growth and lower churn and lower SAC and increase competitive modes.

Reed: And then specifically on the Wii test that is our ever aggressive product and marketing is testing, and the program you approached has been passed at this point.

Deborah: Second question from Scott Davis, is RedBox considering a streaming service on lower price with $8.99 per month subscription. Are you revisiting the idea of offering the streaming only subscription plan at a lower price point?

Reed: No, Scott. RedBox does many things incredibly well but we are not worried about them particularly as only streaming competitor. So anything to do with streaming does not affect how we think about that I suppose.

Deborah: Finally, given the ever-expanding numbers of network-enabled devices, how do you see or expect to see consumers trading up to a higher price subscription plan in order to watch multiple videos simultaneously, either multiple people in different rooms in the house, mobile users watching while others at home are as well, or to have network-enabled on greater than 6 devices?

Barry: In the next year or two, we've got to anticipate much of that. It is pretty much one account per family model in the near term.

Deborah: Next questions are from Andy Hargreaves at Pacific Crest Securities. To your knowledge, are cable satellite subscribers canceling, citing your service increasing numbers -- if so, could that impact your ability to gain access to the TV content?

Reed: Andy, there has been a bunch of stories about so called court cutting but we haven't seen a lot of it. Netflix has a subtext of the content available on typical MSL system particularly no sports. So it is not much of a substitute for the packages that MSL offers.

Deborah: He had a second question with regards to GNA. What role is the increase in quarter and should GNA stay around the Q1 level through 2010?

Barry: In two contributing factors primarily. On the comp side, CS swapped up very large percentage of its comp this year versus last year and has a higher rate expense. So he is doubling down his investment in business in that way so that is encouraging; and secondly if the brand has grown the plan has become more active and legal expenses as consequence are up year over year and Q-over-Q basis.

Deborah: The next set of questions are from Martin. First there is a long-term content question. As network subscriber base grows and seemingly gets closer and closer to total subscriber premium paid TV network like HBO, Showtime, and Star. Does the company ever need to think about borrowing a page from their strategy and investing in unique original content? Over the long-term it seems that for a video network to remain relevant to consumers ward off competition, it needs unique content otherwise the check becomes the main barrier to entry which is not sustainable. Do you agree or disagree with that thought?

Barry: Martin, it is a good deep analysis, but I disagree, and your premises that video services such as HBO and Star needs original content to differentiate and I am not in disagreement on that part, but what Netflix has to differentiate is the user interface personalization on the demand aspect of the Internet, and our view is that we could remain a packager and be significantly differentiated from other services, because our value add is not just of the content it is also of recommendation. How people interact with them and help them with matter of content that they are going to end up loving. So our view is that we wouldn't ever need to go into original series. I would certainly say that if we ever did, we probably have to run along CEO and shouldn't be based on Silicon Valley, and a number of other things that makes that an unpromising avenue. So instead what we are focused on is can we license the contents as we have with Star, we have some content in Showtime, not yet anything from FX or HBO and as those firms look at us. They can look at us in two ways. One is today we are another packager of movies and a potential competitor, or they can look at it as a natural distributor for their original series. When we see the enormous success that Star is having with Spartacus that Showtime has had you know with Weeds, Californication, and others as HBO has had for many years. You can see those services are differentially good at original series and so will be healthy to remain in partnership, will have us as a great distributor writing them big cheques for their original contents. We focus on packaging and they focus on the original series.

Deborah: Next question is related to the growth margin and the 28-day window. Does the new 28-day window deal with Warner Brothers have a meaningful impact on the Q1 growth margin? Can you discuss that growth margin and the materiality of the impact? How do you see the 28-day window deal with Warner Brothers and other studios affecting growth margin for the balance of the year?

Reed: I will let Barry talk about the growth margin as a whole. You remember what we are doing is saving money on DVD and putting them into streaming.

Barry: OK, if you ask the question if we are saving money on DVD, the answer is yes. If we are saving money on the content the answer is no because we are making a choice and put those additional money into more streaming content which is the perfect way to remind everyone that growth margin in that way is a managed outcome.

Deborah: Last question from Barton, you say you intend to remain active in this year share repurchases. Your repurchase volume doesn't seem to have been affected much by the meteorite rise in Netflix stock. Are we anywhere near the price of the Netflix share that will constitute to scale back your sale repurchase volumes?

Barry: No, and just to extend on the answer, I would say if you look at the rearview mirror the stock looks expensive, and Wall Street Journal back in January, and in middle of last year for repurchasing in record high prices, which now in retrospect is pretty attractive. So whether you think the stock is expensive or cheap depends entirely on your view since you are the guy in business. You could imagine Netflix is a winner with a very large market and probably the target price which we are willing to acquire the stock is relatively high, and if any alternative you think we get trampled, the margins get trampled in this stage and perhaps you know that you are going to buy the stock and we have to continue to be up and optimistic view about the likely success, and states as a result may have pretty aggressive target which will enable to buy stock and so far so good.

Deborah: The next question is from Michael for Jefferies. What do you think tax rates are on tons and millions of devices Netflix is now integrated with, and are mobile device partnership incremental for new sub additions or mobile devices just charms the subs using to watch instantly through other devices?

Reed: Mike, the generous tons and millions that you referred to for devices may be true as more devices sell and come to the market with networks included in them, although that is a little aggressive for the current situation. In mobile, I would say I'm not sure if it is a vehicle or you know just one of the many platforms that someone watches. My intuition would be that it is one of the many platforms that someone access networks with and if that helps but either way it is not that much work to put up a client together for a mobile device. It makes sense for us to do.

Deborah: The next question is from Dan Ernest from Hudson Square. This is in regards to the Netflix iPad ad. Can you talk about any trends in terms of subscriber viewing that you have seen with the iPad or subscribers or viewing?

Reed: Dan, I can say wonderful things about the Apple ecosystem. It brings so much of press and attention to the company, and obviously took its call in excess of its short-term contribution to viewing of subscribers. In the long term, the iPad is a very exciting device that has great potential, but in the short term in comparison to the nearly 30 million households that have Wii, it is not a major contributor.

Deborah: Next two questions are from Brian Fitzgerald at UBS. What is the most popular content category on the streaming surface?

Reed: The beautiful thing about Netflix is that it is adaptive to the individual taste. So if a subscriber really likes, you know, comedy, it will start featuring lots of comedy. If a subscriber likes drama or TV shows or horror, it adapts to their taste, and that is our fundamental focus, which is learning the taste of each of our members and presenting them an experience that makes them feel wow Netflix has all the stuff that I really want to watch. So we really don't focus on programming for categories or types. It is really a broad set of content and then our focus is on learning and adapting in the user interface for a particular taste.

Deborah: The next question is from Brian at UBS. Regarding Netflix's relationship with TiVo and the new premiere set-top box. This box will be deployed as the set-top box for the RCN users. Will Netflix have to remove Star contents for those users for not to conflict with RCN's offerings?

Reed: I really didn't know that about the TiVo RCN. I am not sure I haven't heard anything to that. I think I probably would have if there was a conflict so I imagine there isn't one.

Deborah: Next question is from Matt Schindler, BVA. Your stand on the DVD library of just 37 million is down to 21% year over year and 35% year over year, I think one of them must be Q-over-Q, despite the steep rise in subscribers. Is this the client driven by their recent better library management and back cataloging marketing, Time Warner contract, user streaming content for DVD, or simply lack of big Hollywood hits in Q1 to buy?

Barry: I would say none of the above. It reflects a shift in purchasing to web share and the web share gets expanded in the P&L and we don't see it. It flows through the statement of cash flows like CAPEX for content purchasing or DVD stuff.

Deborah: The next question is from JP Morgan. Could you please give us some color on your for customers who are streaming predominantly?

Barry: We are going to break out individual term in two different sectors. I would say overall we are very happy with where turn is trending and you are seeing turn coming down and streaming rising that is a good thing. Sorry I just want to state some comments that I made in last quarter and in my commentary on the website. I attributed record low turn to part of growth in streaming and made similar comments last quarter. So you should refer that the subscribers who were engaged in streaming were instrumental and happy and staying longer.

Deborah: The next question is from John Blackledge. Would you expect to raise additional debt in 2010?

Reed: Not likely, John. I think we have got something like 0.74 terms of debt on the business and we have no immediate plans.

Deborah: The next question is from Richard Skaggs from Luminous Sales. Share repurchase is substantial in the quarter increasing balance sheet leverage on the surface, what do you see as an optimal debt to capital ratio given the predictability of cash flows and other investment opportunities?

Barry: Still choosing that out and not prepared the talk about it publicly. I mean we can very comfortably support one and a half term of debt, and the business as I said is currently less than 0.821, but I would want the capital structure to be conservative enough so that company if we were able to challenge competitively, it never be constrained on the operating decisions we made to confront competition. I wouldn't want that leverage to get in the way of any decisions that we would want to make in the future. On the other hand, the business is growing rapidly, competitive modes seem well established, and we are very optimistic about the future so we would be able to put some calls on the contacts of our interest in using and financing the repurchase.

Reed: Really the bigger driver than how much leverage just that we are clearly not in the mode of trying to build our cash up. If we had not done any buy back in the last three years we would have had a billion dollars on the balance sheet. I mean that sounds good and nice volume but we are really happy with the decision that we have made and the cash is pretty steady and to return that money to the shareholders so that part is what we need to talk about.

Deborah: Next question is from Jefferies. Can you explain the reason for moving from Amazon to AWL? Can you quantify potential savings?

Reed: I am not sure on the savings architecturally. We are big believers in the public cloud for any company that doesn't have Google or Facebook scales basically. As you know that you get to take advantage of their vast resources. So we think that it would help us with cost and help us with reliability. It is a little early in the public cloud movement. We would see a lot of other companies enter that space and the vigorous competition will help lower the prices down which will be a benefit for us. If we are architected by the public cloud.

Barry: Library for new platform launches when prepared.

Reed: That is right, Barry, good anecdote, and when we moved our encoding facility out of our internal data center in Amazon about 6 months ago, and when we got the sudden ability to do the Apple iPad, and we had to do a very large encoding job, we would have never been able to, and would have taken 6 months in our prior internal data center because of the elasticity of the public cloud, we were able to spin up thousands and thousands of encoding processes to do a parallel. We have already seen good progress from that.

Deborah: The next question is from Mario Cibelli, Marathon Partners. Will Netflix still deliver its last DVD in 2030?

Reed: Mario, I will personally deliver that DVD in 2030, and yes that is still our best guess on now when we look at the DVD market. Our DVD shipments are continuing to climb throughout the country. Even in the Bay Area where you see the outstanding up to 24% of the area households subscribing to Netflix and our DVD and Blu-ray combined are continuing to grow. So DVD has got a lot of users and 2030 is still the target.

Deborah: Last couple of questions and they are from Scott Davis from Morgan and Stanley. Now that Netflix is available on the iPad and is expected on the iPhone, what is the likelihood that the Netflix have plans on AppleTV some day?

Reed: You know Apple declared themselves about two months ago to be a mobile company and just focused on mobile, mobile, mobile so I am not sure how much going forward would be spend on AppleTV. If they start an investment, it would be something for us but at this point it is not the focus. The focus is on mobile and we will work with them on all of those mobile platforms as we have been.

Deborah: And finally given the increased focus on mobile devices and the incremental engineering process associated with developing products for these popcorns, do you see any opportunity to monetize this customer based differently for example offering a higher price plan that includes mobile access similar to Blu-Ray?

Reed: You know on the web the basic model is that you are a web-based or Internet-based services available on the devices that have web browsers or speedy Internet. So that is the basic paradigm as opposed one price on this type of PC and another price on different machine. We are very much a web-centric unit Internet firm in that way, and because of that we tend not to think about things like extra charges for certain modalities of access. We do think about charges for HD, if we think about mobile content but that is across all of the devices that is simply to us Internet access devices.

Deborah: Great. Operator, that was the last question I had. Before we conclude the call, I would like to turn back the call over to Reed Hastings for some closing remarks.

Reed: Thanks Deborah, and thanks to all of you for joining us on the call. Q1 was another great quarter, and as you can see from our guidance, we are well positioned for continued growth, and I look forward to reporting to you on our progress on next quarter's call.

Operator: This concludes the program. Thank you for your participation and have a wonderful day.