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Netflix Posts $8 Million Q4 Profit

23 Jan, 2013 By: Erik Gruenwedel

Disc rental sub decline lower than expected; segment delivers 50% of Netflix's operating income

Netflix Jan. 23 posted fourth-quarter (ended Dec. 31) net income of $8 million, down 77% from net income of $35 million during the previous-year period. Global revenue topped $945 million, up nearly 8% from revenue of $876 million last year.

Los Gatos, Calif.-based Netflix said it added 2 million domestic streaming subscribers in the quarter to end the fiscal year with 27 million domestic streaming subs. The service added 1.8 million international streaming subs for a total of 6.12 million overall.

Netflix said it expects to add 2.2 million domestic subs in the first quarter, in addition to 1.18 million international.

Domestic disc subscribers, which include hybrid physical and streaming subs, declined less than expected (380,000 subs) to 8.22 million overall. The segment generated 50% of Netflix’s operating income with $128 million, which was down 34% from operating income of $194 million last year.

The results were polar opposite to what many analysts had predicted, including a quarterly loss and only half as many subscriber gains.

Regardless, CEO Reed Hastings and CFO David Wells, in a shareholder letter accompanying the financials, remained cautious going forward.

"We anticipate net income will be relatively flat quarter over quarter in Q1, as improvements in both domestic and international streaming profits will be offset by a decline in DVD contribution profit and increases in global operating expenses," Hastings and Wells wrote in the letter.

Meanwhile, Hastings and Wells said Netflix is eying hundreds of millions in new debt to pay for an ambitious slate of original content in 2013.

The launch of five new series and the second season of “Lilyhammer” beginning Feb. 1 will expand Netflix’s negative free cash — increasing the likelihood the company will refinance more than $200 million in new debt to pay for it.

Hastings said the fourth-quarter gap between free cash flow (negative $51 million) and net income ($8 million) would widen significantly in the first quarter due to payments for original programs being released this year.

Netflix Feb. 1 is launching “House of Cards,” starring Kevin Spacey, Robin Wright and Kate Mara, which will be followed by Eli Roth’s horror-thriller “Hemlock Grove” on April 19, and the reboot of former Fox comedy “Arrested Development” in May. Thereafter, Netflix is launching “Orange Is the New Black,” a prison dramedy from “Weeds” creator Jenji Kohan; “Derek” with Ricky Gervais; and, lastly, the sophomore season of “Lilyhammer.”

“If we are successful with our originals, we will produce content with comparable cost per viewing hour to other exclusive premium content,” Hastings and Wells wrote. “Success with originals will also enhance the global reputation of Netflix as a source of unique must-view content.”

That success has upfront costs. Netflix said original programming would require more upfront cash payments than other content licensing agreements — raising the ratio of cash to P&L (profit/loss) to as high as 120% in certain quarters. The bulk of its remaining cash payments for current originals will be in Q1, driving free cash flow materially more negative than Q4.

“We are exploring taking advantage of the current low interest rate environment to refinance our $200 million in outstanding notes and raise additional cash through new debt financing,” Hastings and Wells wrote. “This would give us additional reserves as well as increased flexibility to fund future originals.”

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