Netflix Beats Q4 Earnings Estimates - Multichannel

Netflix Beats Q4 Earnings Estimates

Touts Original Series, but Stresses Future Investments Based on Performance of This Year's Slate
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Despite predictions by some analysts that Netflix would post a loss in the fourth quarter, the streaming media company reported a revenue increase to $945 million and a net profit of $8 million, with domestic streaming subscribers growing by about 2 million from the third quarter to 27.1 million in the fourth.

Netflix shares jumped by more than 30% in after-hours trading.

In discussing the company's better-than-expected fourth quarter 2012 earnings, CEO Reed Hastings and CFO David Wells highlighted the importance of their upcoming original series as an important differentiator in the increasingly competitive streaming video landscape.

But they also stressed that they planned to stay flexible on future investments in original programming and noted that they would be reassessing their plans for 2014 original programming slates based on the performance of the 2012 slate.

In a letter to shareholders, the company executives acknowledged increased competition from the TV Everywhere offerings of multichannel providers and the growing investments by companies like Amazon, Hulu and Google.

Reed also told analysts that Netflix has become a profitable window for cable networks to promote and sell their content and that increased demand for high bandwidth services like Netflix would be good for cable operators because it would increase demand for faster, more expensive broadband offerings.

Analysts did not ask Reed about the 10% stake Carl Ichan had made in the company. In the shareholder letter, Netflix executives noted "we have no further views on his intentions but have had constructive conversations with him about building a more valuable company."

Strong Q4 Revenue and Sub Growth

While the company reported better-than-expected profits and strong revenue and subscribers growth, the fourth-quarter earnings continued to be hampered by the costs of its international expansion and programming outlays.

Fourth-quarter profit declined to $8 million from $35.2 million in the 2011 period to $8 million, even though revenue increased 8% to $945.2 million from $875.6 million.

That decline reflected increases in the cost of revenue from $575 million in the 4th quarter of 2011 to $696 million in the fourth quarter of 2012.

International streaming subs increased by 1.8 million in the quarter to 6.1 million while domestic DVDs declined by 38,000 to 8.22 million.

For the full year, Netflix added nearly 10 million global streaming members in 2012, for a total over 33 million.

Rising costs reduced full year net income from $226.1 million in 2011 to $17.1 million in 2012.

In the report, Netflix predicted that domestic streaming subs would grow to somewhere between 28.5 million and 29.2 million and that it would post a net profit of between $0 to $14 million in the first quarter of 2013.

Netflix Faces Growing Competition

Despite strong fourth-quarter results, the company continues to face strong competition. In the letter to shareholders, Reed and Wells admitted that domestic competition continues to grow and that TV Everywhere offerings continue to improve, creating increased competition for "viewing time."

While its streaming media rivals Amazon, Hulu Plus and Redbox continue to improve their offerings, Reed and Wells argued that their large subscriber base and strong position in the market continues to allow them to offer a much stronger programming slate.

Netflix Is Good For Cable

In response to a question on the impact on cable if Netflix achieved 50 million subs, Reed argued that Netflix window help promote cable shows. "If you look at shows like Breaking Bad and Mad Men [making previous season available on Netflix prior to the launch of a new season] has been a huge win," he said. "They get bigger and bigger audiences and if [the show is no longer on air] then it is pure incremental revenue...We don't see a huge conflict in that licensing dynamic."

Reed also argued that "cable broadband is very profitable" and that services like Netflix "are critical for driving more adoption of higher end [broadband] packages."

More Originals In the Pipeline

Faced with the increased competition, Reed and Wells argued that the company's sizable subscriber base would help them afford significant programming investments and differentiate themselves from their rivals. "In such a world, our originals will be a great asset," the shareholder letter noted.

In the shareholder letter, they also called the Feb. 1 launch of House of Cards "a defining moment in the development of Internet TV."

Repeating arguments company executives have made earlier, they argued that Netflix's programming model of making all episodes available simultaneously and building up an aggregated audience over time would produce much lower marketing costs while generating higher viewership.

House of Cards will be followed by Eli Roth's Hemlock Grove on April 19th; the fourth season of Arrested Development in May; Orange is the New Black, from Weeds creator Jenji Kohan; Derek with Ricky Gervais; and season two of Lilyhammer.

While that slate will produce some greater upfront costs, the executives argued in the letter to shareholders that "we have sufficient cash on hand to fund our current slate of originals and ongoing expenses."

In the call with analysts, the two executives stressed their flexible approach to originals and said no firm plans had been made on spending levels for their 2014 slate. "We haven't made decision on what percentage of the budget looks like [in 2014]," Reed said and said they would be reviewing subscriber acquisition trends.

The executives noted they expected little impact on subscriber acquisition from House of Cards in the first quarter of 2013 but reiterated their belief that Arrested Development could produce a bump in subs during the second quarter. "Arrested Development is unique" because of the ready-made audience, Reed said.

International Loses to Decline

Netflix reported increase international loses for fourth quarter rising to $105 million from $92 million in the third quarter, in part because of its Nordic launch. But in shareholder letter, the company noted that they expected those to decline in 2013. "We are satisfied with the progress we are making," Reed said.

Still on Probation With Subscribers

Reed acknowledged that the company hadn't completely rebuilt its brand after the controversy over increased prices. "We are still extremely thoughtful and careful about what we do," he noted "We are out of jail but still on probation."