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Netflix Q2 Income Drops 91%

24 Jul, 2012 By: Erik Gruenwedel

Netflix July 24 reported second-quarter (ended June 30) net income of $6 million, which was 91% less than the $68 million profit reported during the previous-year period.

However, the profit was a positive turn for the Los Gatos, Calif.-based streaming rental pioneer, which had projected net losses for much of 2012.

Revenue for the quarter was $889 million compared to revenue of $789 million last year.

Netflix added 530,000 domestic streaming subscribers in the quarter, bringing its domestic base to 23.94 million members. The service added 560,000 international streaming subs to push its foreign base to 3.62 million subs.

Netflix had just 970,000 total international subscribers during the same period last year.

Netflix lost 850,000 disc subscribers in Q2, to end the period with 9.24 million physical media subscribers. The decline in disc subs is noteworthy, considering Netflix reported $134 million in contribution profit from physical rentals, including 46% margins.

The company said that 6.7 million of physical renters also stream content, which means that nearly 73% of disc subs are paying $15.98 monthly for the higher-margin hybrid plan. By comparison, international streaming lost $89 million while domestic streaming generated $83 million contribution profit and 15.6% margins.

"Going forward, we believe DVD member declines will continue to moderate, while contribution margin will be roughly flat for the remainder of the year,"  Netflix CEO Reed Hastings and CFO David Wrote wrote in a shareholder letter. "The first round of USPS processing center reductions took effect in the first week of July. So far, we see minimal service related impact from these reductions."

Hastings and Wells said the company’s further expansion in Europe during the fourth quarter would “temporarily” return Netflix to posting a loss. In a call with analysts, Hastings said expansion into additional markets hinges on three conditions, including that it helps get Netflix back to global profitability; meshes with the progress being made in existing markets; and that it represents a good opportunity to expand.

“We have enormous challenges ahead, and no doubt will have further ups and downs as we pioneer Internet television,” they wrote. “We are making progress in every market we serve, and see a once-in-a-generation opportunity ahead to build the world’s most popular TV show and movie service.”

Indeed, Netflix said domestic net subscriber additions were 50% less than during the same period last year, which it had projected. In the letter to shareholders, Hastings and Wells said subscriber addtions in the current (third) quarter were similar to the same period in 2010 — with one notable caveat. Netflix that year launched streaming service on the Apple iPhone, and with the Olympics beginning on July 27, Hastings and Wells said the quadrennial sporting event is likely to have a "negative impact on Netflix viewing and sign-ups."

The executives said Netflix is on track to add 1 million to 1.8 million domestic net new subs in Q3, adding if it reaches the high end of projections would remain on target to achieve 7 million domestic net addtions by the year end. If it doesn't end Q3 near 1.8 million net addtions, Hastings and Wells admitted Netflix will have a difficult time achieving its year-end subscriber goal.

"In either case, we are generating impressive growth this year in our most developed market," the executives wrote.

The lowered expectations sent Netflix shares plummeting more than 14% in after-hours trading.


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