Good day, everyone. Welcome to the Netflix first quarter 2013 earnings Q&A session. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Erin Kasenchak, Director of IR. Please go ahead.
Thank you. Good afternoon. Welcome to the Netflix first quarter 2013 earnings Q&A session. I'm joined by Reed Hastings, CEO, and David Wells, CFO. We announced our financial results for the first quarter at approximately 1:00 P.M. Pacific Time today. The shareholder letter and the Q1 financial results and the webcast of this Q&A session are also available at the company's investor relations website at ir.netflix.com. As is our standard practice, we will begin the call with questions received via email. Please email your questions to ir@netflix.com. After email Q&A, we will also open up the phone lines for additional questions not covered by the email Q&A or letter, and the dial-in number is written within our investor letter. 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 filings with the Securities and Exchange Commission, including our annual report on Form 10-K, filed with the Commission on February 1st, 2013. A replay of this Q&A session will be available at the Netflix website after 6:00 P.M. Pacific Time today. Let's move into questions. As is our standard practice, we've organized the questions by topics as we've received them this afternoon. The first question is in regards to domestic streaming. How do you think about the risk in allowing domestic streaming margins to rise too high quickly, example, in pacing more competition or under-investing in future growth?
Hi, this is David Wells, the CFO. Well, we think that with our growth, we're able to do both. We don't think that we're raising margins very quickly. We're taking a measured approach, and with the growth, we're able to do both.
Great. Do you believe you can maintain domestic streaming marketing costs in 2013 flat with 2012?
We'll take that. It's Reed here. We'll take that quarter by quarter. As our reputation improves from the service improvements we're making, and we get great PR around the original content, then that's what gives us a larger presence despite steady paid marketing spend.
Do you see a direct correlation between the time a consumer spends using Netflix daily or monthly and their propensity to churn?
Yes, we do. We've said this before, and it still holds that the more a subscriber watches, the better they retain in the service.
Great. When you think about growing your domestic subscriber base, how do you prioritize, one, reaching first-time streaming subscribers, two, finding a way to bring back consumers who've tried the service before and left, or three, reducing churn to maintain your current subscriber base? Have you seen any notable changes in these three groups over the past several months? If so, why?
Well, let's see. In the rejoin case, most of what we do is improving our service so that it works better for them. Someone who's rejoining wants to hear about the content's gotten better or the device-based streaming is better, or the iPhone interface is better, depending on the reason that they canceled. You can't move a rejoin very much with paid marketing because they have a pretty firm idea of what Netflix is. You move someone in rejoin because you can change if you claim the benefit that they didn't perceive before, like those examples that I had. With new member marketing, they have a more hazy idea of what Netflix is, paid advertising can have a bigger impact in changing their perception to be something that they're interested in trying for free.
When we advertise, we think of it mainly as this great service applying to new members. Of course, there's a spillover benefit to existing members that are still on the service and to rejoins. The fundamental of it is to never joins.
Great. Another question as it relates to marketing. Your marketing campaign has evolved pretty dramatically over the past year, as we've illustrated. Could you discuss why you're taking brand marketing and commercials so much more seriously?
I think we've always taken it seriously, our demographics have evolved, our advertising evolves as we become more streaming instead of hybrid, as we get bigger. I think it's a natural outcome as well as just great execution.
How do you think about shared accounts? It grows your brand, yet it is revenue lost. How do you think about the need or importance of cracking down on shared accounts?
Well, it depends what you mean by shared accounts. We usually like to think that a husband and wife can share an account, that that's perfectly appropriate and acceptable. If you mean, "Hey, I got my password from my boyfriend's uncle," then that's not what we would consider appropriate. We focus on serving the immediate family. Our standard plan has two simultaneous streams, that serves the vast majority of families around the world quite well. There's a few times when the family is large that two streams doesn't work, we're now offering or will be offering shortly a four-stream option for about a 50% uplift. Again, as we said, we expect fewer than 1% of our members to take that plan.
The core focus is on the immediate family, we really don't think that there's much going on of the, "I'm going to share my password with a marginal acquaintance.
What do you see the realistic TAM for Netflix? If you look at other premium networks, they tend to peak out at about 30 million subscribers. If you get to that point where your net adds start to slow down, will you put in place price increases, especially since HBO retails for $15 and you only charge $8?
Well, first, we started with streaming at $7.99 three years ago when we introduced the streaming plan. We've kept the same price for the last three years. We're very happy with that price. We've improved the content significantly, improved the devices, and we've kept the same price, $7.99. That's provided us a lot of growth. I don't see any changes in the near term coming in that. Second, in terms of the total available market, we've generally described it as best we can as two to three times that of HBO linear. HBO linear is at about 30 million, and our best guess is that the market for a service like Netflix, because it's less expensive than HBO, it's got more content, it's all on-demand, it's personalized, it's on multiple devices, is somewhere in the two to three times HBO or 60 to 90 million.
We'll really only know that with any confidence when we get there.
What was the biggest driver of domestic streaming subscriber upside in Q1? Higher gross additions or lower churn versus your internal projection?
Well, we don't really talk about the individual. I would say that we've gone to great lengths to raise the content, the quality of the content on the site, and I'd say that was the biggest driver in Q1 overall, were people really engaged in the site and with the content.
Great. Moving on to questions about content. Based on the greater than 4 billion streaming hours reported by Netflix in Q1 2013, we estimate the average Netflix subscriber is streaming 87 minutes of content per day. However, when we analyze Sandvine data related to overall bandwidth consumption, we have noticed a dramatic difference between the mean and median, with the median only one-third of the mean. Is Netflix median monthly streaming dramatically skewed from the mean?
No. Median typically is less than the average because of the heavy users, but it's not dramatic.
Have there been any notable changes in third-party content negotiations since you became more active with originals?
No. I would say the only thing that's noticeably changed in the last 12 months is Hulu and Amazon bidding more aggressively, and that that's made the content owners much happier, and it's made the prices to us higher than they would otherwise be.
How many users access Nickelodeon and MTV content monthly?
Well, I'm not sure. We don't look at it that way of how many users. It's been part of our service for the last two or three years. As we stated in the letter, we had some bids in on particular shows, and so we'll see how that works out.
Also on the Viacom relationship, as you move from a global licensing deal with Viacom to one covering specific titles, can you provide some color on the magnitude of impact this could have on the money you spend licensing domestic content from Viacom?
Well, I don't think you'll see any change. You're not going to see any blip in what we spend or in contribution margin, for example, in Q3.
Okay.
I would say that our content acquisition has already factored in what may or may not happen, and we've got things in the wings that we can add. You'll continue to see us invest in content.
Great. Let's move on to questions about originals. Why wouldn't we expect "Arrested Development" to drive significantly higher net additions in Q2? The guidance implies a rather modest sequential gain.
Well, if in Q1 we had seen, for example, the week before "House of Cards" launched and the week after a big spike, I think then we would be forecasting bigger numbers around particular titles like "Arrested Development". What we've seen with "House of Cards" is a very nice impact, but a gentle impact, not one that's an overnight impact. "Arrested Development"s coming in in the end of May, it's going to be great for us, but it's not a step function, but we've had no evidence and no history of it being a step function. We're comfortable with the projection being our median probability.
Releasing all episodes of "House of Cards," "Hemlock Grove," and soon to be released "Arrested Development" clearly puts the consumer first, yet the social media buzz appears to die off very quickly. In contrast, when you look at TV series, especially HBO and Showtime, which it appears Netflix is trying to emulate, social media buzz benefits notably from the weekly release of a new episode. Why are you so confident in your all-at-once releasing strategy?
Well, I put the buzz on "House of Cards," and I think we're going to see that with "Hemlock." As we mentioned in the letter, "Hemlock" viewing has been fantastic for us. As fantastic as "House of Cards" is, "Hemlock" is getting viewed by even more subscribers in its first couple of days and opening weekend than "House of Cards". We're feeling very good about our original strategy, including the release strategy of being focused on all episodes at once.
Next, there are several questions about how to gauge the success of "House of Cards." Would we share any metrics like what percentage of the base watched one or more episode? How viewership of "House of Cards" compares to other top shows on Netflix? If not, how do we convince someone that it was a good investment?
Well, I think when you look at Netflix, you get to invest in Netflix, not in particular shows. What an investor cares about is that Netflix is a good investment as opposed to, say, "House of Cards." Then individual marketing programs, individual shows, individual regions, are really what we have to do as management in terms of making good trade-offs to make Netflix more valuable overall. On that basis, we're feeling very excited about what's happened with "House of Cards" and with "Hemlock," what's coming with "Arrested Development" and "Orange Is the New Black." I think over this year, with the continuing rollout of these original shows, you're going to see a very nice redefinition and broadening of what Netflix is to our members. It's something we'll take a step at a time.
As we mentioned, our total P&L spending on originals is still single digits. It'll still be single digits next year. It's growing, but it's still the relatively modest part of our total content spend.
House of Cards" is available for pre-order on Amazon.com. Can you explain where your rights to the show stand in relation to sales of the show on DVD and Blu-ray? Do you receive a cut for each one sold, and if so, how much?
We're not going to comment on the specifics. Each deal for original is a little bit different. MRC developed "House of Cards." We were the first window licenser in certain territories. They have the other rights with certain holdbacks. Occasionally you'll see something where the DVD's out earlier than you might otherwise expect.
With "House of Cards," you promoted the show in a very visible way when people logged into their Netflix accounts. Should we expect ongoing "Hemlock Grove" promotion in the same way?
Only if your demographic profile and what you've been watching includes things like "The Vampire Diaries" and such shows, because what we do is match it to the person and to their viewing history, or if someone in your household is watching that. We try to be very good about matching the right promotion to the right person.
Looking over the next few years, how many original series do you believe you would be willing or able to produce?
Well, we'll start this year with just our six or seven seasons. We'll take that up a little bit next year, and we'll see as we go in terms of what we learn, what experience. There's no set number we're trying to target, and it will depend upon the results that we see.
How do your originals perform in international regions versus the U.S.?
We've only got three so far, "Lilyhammer," "House of Cards," and "Hemlock," and I would say each one is unique in its territory. We do program for these being good internationally, and some of them have been really big hits. You may have noticed that with "Hemlock," we did one of the first premieres for it, premiere parties in Mexico City. That's an indication that we really focus on the global attractiveness of the content.
Regarding the expensing of original content such as "House of Cards," over how many months, quarters, years does Netflix anticipate amortizing the cost of the content? That is, what is the expected life of original content? Also, does original content generally carry a longer useful life relative to other purchased content?
No, it doesn't generally carry from an amortization period longer than other content. We could discuss whether or not the actual useful life of that content might be longer, but we don't have any history, so we're a little bit conservative at this point. The typical license period, or the typical amortization period is straight lined over the license period.
Looking at the cost to produce very high-quality content like "House of Cards," do you think this cost will increase, decrease, or stay about the same over time?
I'm not sure. It hasn't moved dramatically despite digital filmmaking. If anything, the scale of distribution drives both movie production cost per hour and television cost per hour up because the value of great product with a large distribution channel has increased. That effect has overwhelmed what some people thought would be bringing down the cost a lot of production through digital filmmaking techniques.
With the success of "House of Cards" and your growing stable of originals, has movies become a less strategic asset to Netflix?
I sure hope not given how much we've signed up to spend with Disney. We very much are investors in the movie franchise both in the U.S. and around the world, and big believers in the role of movies on our service.
Great. Let's turn to a question on competition. Amazon has clearly bid up some popular titles. Are you seeing them be highly competitive in most of your negotiations, or are they just stepping up for select content?
It varies quite a bit by region and by type of content. Certainly all the sellers of content want to have many active bidders. They are approaching everybody, Redbox, Hulu, the cable networks, to try to get bids to be competitive.
Great. Let's turn to questions on international. Do you have a set reinvestment plan for international growth? Meaning, is there a percentage of cash flow generated domestically that you will invest annually into international? Do you envision continuing to add new overseas markets ahead of getting the entire international business to profitability? Meaning, should we expect overall international losses to continue for years to come in aggregate?
Well, we've said in the past that what's been our approach with international is that we'll take a measured approach gated by global profitability and our overall confidence in the growth of the existing markets that we have today, and that hasn't changed. I think, it is safe to say that you'll see another couple of years of international losses as those markets mature and grow towards profitability, and as we launch additional markets. As for going forward, we'll continue to take that measured approach. We'll have to gain confidence in the new markets as we address new opportunities and go from there.
As sort of a follow-up, any update on the profitability timeline for individual international markets like Latin America or U.K. specifically?
We don't give specifics. We've given some directions in the past in terms of those markets being competitive and taking longer than Canada. I'd say that's still accurate.
We've said specifically that all of the markets are growing, and that we're profitable in Canada.
Would you consider shutting down such higher-loss territories like Latin America?
Well, we're still making very good progress. Again, we've said that we're growing and we're reducing losses in those markets. We're not losing out to any competitors. If we get into a situation where we thought we were losing to competition, we'd have to consider that, but that's not where we see ourselves today.
The simple answer is no, we wouldn't.
Should we model the initial spend for the European launch to be comparable to other international launches? Will this be Q3 or Q4?
We've said second half, we'll stick with that articulation. Sure you could model it about like other launches.
Turning to a few questions on DVD. Do you believe that you have less visibility into the subscriber and revenue elements of DVD business? Is that a factor in reducing the guidance disclosure?
No, we don't. In fact, we probably have more visibility into that than we did, say, one year to 18 months ago. The reason we dropped the guidance was because profit is what matters, and that really is the only thing that matters at this point. We'll continue to report subscribers and revenue, but we'll only give guidance on the profit.
Great. You have been able to relatively maintain strong DVD contribution margins even with declining subscriber levels. At what level of DVD subs would that ability to leverage fixed costs break down and lead to a meaningful step down in overall profit margins?
Well, we took the DVD business profitable at around 1 million subscribers, and given that we've got a large investment in equipment that we won't have to continue to invest in our content library and our DVD content library, we feel pretty good about our ability to maintain those margins going forward.
Great. Let's turn to some questions on product improvement. ISPs appear increasingly open to the idea of offering promotions incorporating Netflix as a benefit to their own subscribers for paying up for premium service higher speed tiers. How do you think about this opportunity?
I think the ISP business is turning out to be extremely profitable because ISPs don't have content costs, if they can get their customers to purchase higher bandwidth packages, that's almost pure additional margin for the ISP. One of the major reasons that a customer might do a higher bandwidth package is to use video, from us, from Hulu, from Amazon, and others. The more that our network integration is highly effective, that they're integrated with Open Connect, then the more their customers will actually get the benefit of a faster last mile. There's a nice synergy there of us together providing a better and better experience for their end users.
Great. A question on social. While you succeeded in winning a change in the VPPA, there does not appear to be a meaningful amount of Netflix subscribers choosing to share their streaming activity within their friends on Facebook. Do you think consumers simply are not interested in being that open with their social network?
I think it'll evolve over time. The core focus right now is not so much sharing on Facebook the viewing history. In fact, that's not the default. The default is that it's shared within the Netflix interface. If you give the permissions, the default permissions, you and your friends share within the Netflix user interface what your friends are viewing and get ideas, but not in the Facebook ticker and feed.
How does the profiles feature work for households with a Netflix subscription, what was the early response from the testing?
It's been positive. The key use case is between kids and parents. Right now, parents will say that the experience is suboptimal because the kids viewing is all through their profile, and the kids similarly don't necessarily want to see what their parents are viewing. That's the biggest use case. It'll be really be targeted at families.
Great. Let's look at a few questions on financials. Could the company please quantify its off-balance sheet content liabilities? Specifically interested in both the total amount of obligations outstanding as well as the amount currently outstanding that is not on the balance sheet.
Sure. I'll answer this in total too, because that's usually how we get this question. We had $5.6 billion in commitments as of the end of December. That moved to $5.7 billion in commitments as of the end of March, $2.4 billion being part of liabilities on the balance sheet and $3.3 billion not on the balance sheet.
Great. Do you believe the company can fund its liabilities without an additional debt raise, or would you consider raising capital given the low rate environment?
We just did raise capital, yes, we would consider it, I would say that we're fine on capital at this point.
Great. You had anticipated that free cash flow in the quarter would be more negative than the prior quarter, it ended up more favorable than the prior quarter. You acquired less than $600 million of streaming content this quarter, less than your quarterly run rate last year, despite the payment for House of Cards. Were any content acquisitions deferred to the June quarter? Is this a good run rate for content acquisition, or was this a low quarter?
No content payments were deferred. I would say that we anticipated a bunch of small items stacking on each other in the first quarter that didn't happen. We'll be less lumpy than we previously anticipated. The second part of that question was?
Is this a good run rate for content acquisition?
I'm not sure how to answer a good run rate on content acquisition. I would say that we continue to expand our content. You'll see that expansion has declined over the last year and two years. The rate of expansion has started to slow, but we'll continue to invest in content.
What was your effective Q1 tax rate? What's the tax rate that we should use for the second quarter and the balance of the year?
The balance of the year should be between 34% and 35%. We had a very strange tax rate in the first quarter because of the retroactive reinstatement of the federal R&D tax credit. I think it was over 100% in terms of the sort of strange rate, but that'll flip back to a sort of normal rate going forward.
Great. At this time, I'd like to turn the call over to the operator and begin taking questions from the phone.
If you have a question on the phone, please press *1. If you have a question on the phone, please press *1. Our first question comes from Youssef Squali from Cantor Fitzgerald. Your line is open.
Okay. Thank you very much. Just a couple of questions, please. You guys spent a little more on DVD content this quarter than we were expecting, and you also lost fewer DVD subscribers than we thought. Was there a correlation between the two? I'm assuming there was, but was that something that you guys are now kind of baking into your business going forward? Second, can you expand on the profiles function you guys spoke about in the letter? When does that launch, and what effects would you like to see from it?
Youssef, it's Reed. I'll hit the profiles. It'll be sometime this year, it's not going to affect the financials. It's an example of one more product feature that's useful, there's going to be nothing material to affect the business about it of itself.
Youssef, this is David. On your DVD content question, I wouldn't draw a direct correlation. The first quarter is always the high release quarter for new releases, typically, it depends on the release slates or the studios in terms of what they put out. We sort of set those amounts well ahead of the quarter. I wouldn't draw a direct correlation. I would say that in general, we were pleased as well that DVD subscribers declined at a slower rate than we anticipated. We continue to work hard to make sure that those folks who continue to choose physical have a very good service.
Next question.
Our next question comes from Carlos Kirjner from Sanford Bernstein. Your line is open.
Thank you. Have you deployed Open Connect to measure domestic ISPs such as Comcast, Time Warner Cable, Charter? If not, why do you think that's the case, and how do you square that with your view that Netflix is good for them because it helps them differentiate their offer? Thank you.
Carlos, I'm not going to comment on the specific deals, but we're making progress with ISPs. We started mostly in Europe first because we were just ramping, so that helped with the capacity. We could handle the capacity. We've got the majority or the vast majority of Europe traffic is now on Open Connect, and a growing percentage of that traffic is in the United States. We certainly think that over the next year or two, we'll be able to work with all the major ISPs to get the benefits to both of us on Open Connect.
Thank you.
Our next question comes from Mark Mahaney from RBC. Your line is open.
Great. Thanks. On the new customers, the domestic streaming customers, is there anything you can tell about their usage patterns versus customers you've brought in in the past? Do they seem to be consuming content similarly to similar cohorts in the past? Then in terms of international marketing costs, is there a way to strip out the new country launch costs from the other marketing costs? Once if you take those out, is it that international marketing costs are kind of a steady ramp? Is there something that suggested that they could flatline, or is that way too early in each of those countries' experience for that to happen? Thank you.
Mark, on the domestic side, the new members are performing consistent with the historical trends, which is we've steadily been able to increase viewing as the content and the product improves. So P1s today are a little better in usage than P1s a year ago, that kind of thing. Then second, on the international marketing, yes, there's a launch marketing and then a run rate marketing, just as you would expect. Since we've got and you'll see that a little bit when we have launch quarters, you'll see the marketing be larger than you might otherwise have thought.
It's a little too early to tell if that run rate marketing is going to go up, down, or flat. I would say flat is a safe assumption at this point.
Our next question.
Next question.
Our next question comes from Scott Devitt from Morgan Stanley. Your line is open.
Hi. Thanks. Reed, you talked in the shareholder letter about a decline in your willingness to pay for non-exclusive bulk deals. Now you have an increasingly diverse content portfolio between TV, movie, kids, and originals. Your sub base is much larger than competitors. Theoretically, you would think that you have the ability to amortize the content that you spend over a larger base of subs. You mentioned earlier in the call that, while it's not been the case yet, that you've been able to get favorable negotiations based on this diversity of content now. I was just wondering if you could talk a little bit about the future to the extent that that could change over time.
Secondly, on an associated topic, Ted has been quoted recently in the media discussing expanding the original portfolio to levels that's north of 20 per year, which is quite a bit higher than where you are now. I was just wondering if you could clarify that comment to the extent that you think this 20-plus is a reasonable level, and if so, what type of timeframe of getting there. Thanks.
Let's see. Starting on the second part. It all depends on the timeframe. In the next two years, it's modestly increased. If that were wildly successful for us as the first three shows have been, we could continue to expand to 20 or north. That would be dependent on what happens the rest of this year. What we don't want to do is on the back of three shows, one of which has only been out for four days, suddenly take our commitments up to that kind of 20-plus level. That's in the longer term, and I think it's appropriately ambitious. In terms of the first question, I think we're focused on moving towards more and more exclusive content, which reinforces a reason to join Netflix, a reason to subscribe.
To the degree the content's not exclusive, and it's on cable and on other services, then it might be pleasant to watch on Netflix, but it's not really a reinforcer of why you stay with Netflix or a reinforcer of what you would lose if you were not on Netflix. We've been, I think for the last two or three years, evolving towards more and more exclusivity in that content.
Thank you.
Our next question comes from Richard Greenfield from BTIG. Your line is open.
Hi. Could you give us more info on kind of why the Open Connect initiative is so positive for Netflix? Then, just kind of tied to that, as cable operators, they're showing you within their actual commercials now and marketing you in their mailers. Is there a way that they could basically promote Netflix or give away Netflix or pass through cost of Netflix the way they do and give a six or 12 months of HBO or Showtime? How could that work? Is that something we might see in the next year?
Let's see. Open Connect is one of our investments to improve the Netflix member experience. Long-form content has some unique aspects that you can tailor at low cost on a CDN if you're not also serving short-form content like the general commercial CDNs are optimized for. In the scheme of things, it's pretty modest relative to our P&L. It's not particularly significant. In terms of the second question, which is kind of commercial integration with ISPs and broadband. We haven't seen a lot that is particularly effective. We've seen some things where some companies will purchase gift certificates for Netflix and then advertise that if a person signs up for a service or buys a device, they also get three or six months of Netflix, which is a gift certificate that they bought. Some of those are working quite well.
I doubt that you'll see anything in the way that you typically would've seen for HBO or Showtime marketing with cable, where you get those big free periods in exchange for signing up. The business model that we have now works very well for us, and since it's working very well, we're more likely just to focus on executing it extremely well rather than making it, say, more complicated with those types of interactions.
Thank you.
Our next question comes from Heath Terry from Goldman Sachs. Your line is open.
Great. Thanks. I was wondering if you could give us a sense, even if it's just sort of high level, of what share of the current subscriber base you feel like will be impacted or interested in the multi-tier subscriber or multi-stream subscription plans, or would need those in order to maintain their current level of usage?
Do you mean the four-out $11.99 plan Heath?
Right.
Less than 1% of our members.
Okay, great. Thank you.
Our next question comes from Michael Olson with Piper Jaffray. Your line is open.
Hey, good afternoon. It looks like originals are having success out of the gates. As your library of exclusive content grows, you could argue that subs will perceive higher value in the subscription. Under that assumption, as we get farther from the PR issues of a couple of years ago, will you look more seriously at tweaking up pricing?
I think we were pretty clear in our letter about that. We're pretty happy with the current $7.99 price.
Okay, thanks.
Our next question comes from John Blackledge with Cowen and Company. Your line is open.
Great. Thank you. Two questions. If you could just provide an update on the brand. Is it recovering more quickly than you anticipated since the brand hit following the split of the streaming and DVD service in 2011? Secondly, the Q2 2013 U.S. streaming net add guidance at the midpoint is a bit above Q2 2012 net adds. That appears moderately more positive than commentary from the Q4 2012 letter which suggested Q2 2013 net adds would be below Q2 2012 levels. Was original programming driving moderately better guidance, or are there other factors involved? Thanks.
John, I'll take the second part of that question, which is our Q2 net adds guidance. I would say that ordinarily we would expect, because of seasonality, to have a lower Q2 than prior year, but we've seen a lot of improvements. We talked about that in the letter. We've seen a lot of improvements in our product, in our content, in the interface, and in the brand recovery, and I think those are carrying through. We're anticipating being slightly up year-over-year. I'll let Reed comment as to the brand recovery as to whether that's ahead, on track, or about as expected.
On the guidance, we have "Arrested Development" in the end of May, which will be an absolutely spectacular phenomenon, where we've got an established brand that's a cult favorite, it's been off the air for seven years, and Mitch Hurwitz and the cast have done just a remarkable job. We're unlikely to have that again in Q2 a year from now. I think we'll return to the seasonal pattern where Q2 is less than the prior year. In terms of brand recovery, it's been just as we had hoped and thought and expected, which is a sort of over three years where you get the bulk of that in the first part. We're making steady progress, and we'll continue to work hard to make steady progress going forward.
Great. Thank you.
Our next question comes from Doug Anmuth with J.P. Morgan. Your line is open.
Great. Thanks for taking the question. I just wanted to ask two things. First, how do you compare Netflix's ability to curate and influence original content relative to other pay TV networks? How important is that to producers when you're talking to them about originals? Do you think that's an area where you would expect Netflix to bulk up or to work more closely with creators on content? Secondly, just a question on mobile. Any color on the % of usage coming from tablets and smartphones? Do you think there's any chance here going forward that we could see mobile smooth out some of the seasonality that you typically see during the summer months? Thanks.
Doug, let's see. In terms of mobile and tablet, it's continuing to grow. Whether it smooths out seasonality, I'm not sure. Most of the mobile use is on Wi-Fi. It's sort of home use, rather than over the cellular networks, which have the fairly low data cap. What was the first part?
Curating-
How we work, well, yeah, with producers. We're getting, I think, more sophisticated in terms of working with producers in the creative community. I think we've got a great start in what we've done, obviously. We'll continue to learn as we do more. As we bring great success to the creators, then certainly that increases our reputation in the creative community.
Great. That's all the time we have for questions today. Reed, would you like to make some closing remarks?
Thank you all for your support, and I hope everyone gets a chance to see "Hemlock Grove.
Thanks.
Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.