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Netflix Q3 Profit Drops 88%, Adds 1.2M Subs

23 Oct, 2012 By: Erik Gruenwedel

SVOD pioneer says subs viewed 3 billion hours of content in the third quarter

Netflix Oct. 23 said it posted a third-quarter (ended Sept. 30) profit of $7.6 million — down nearly 88% from a profit of $62.5 million during the previous-year period. Global revenue increased 10% to $905 million, compared with $822 million last year.

Los Gatos, Calif.-based Netflix said it added 1.16 million domestic streaming subscribers in the quarter, in addition to 690,000 international subs. The service added 510,000 international subs during the same period last year before it started rental streaming in the United Kingdom and Ireland.

The domestic subscriber additions were well below projections and leave Netflix less than half-way to its year-end net addition goal of 7 million subs. Netflix ended the quarter with 23.8 million domestic and 4.31 million international streaming subs. It lost 630,000 disc subs to end the period with 8.61 million.

Regardless, disc rentals continue to drive margins, generating $131 million in contribution profit and 48.2% margin — the highest since the fourth quarter last year. Domestic streaming generated $91 million contribution profit and 16.4% margin, while international operations posted a contribution loss of $92 million, up 75% from a contribution loss of $23 million last year.

Indeed, Netflix expects the contribution loss for international operations to reach $113 million in the fourth quarter and then decline in 2013.

“While we are not growing membership as fast as in 2010, we think that over time nearly all U.S. households will be broadband households, nearly all video will be Internet video, and that as our content and member experience continue to improve faster than competitors,” CEO Reed Hastings and CFO David Wells wrote in a shareholder letter.

The executives said Netflix’s long-term domestic market opportunity remains two-three times that of linear HBO. They said Netflix would resume international expansion after "significantly" reducing foreign losses and establishing the SVOD service's profitability on a global basis.

Eric Wold, analyst with B. Riley & Co. in Los Angeles, said he has predicted 5.6 million additional paid subs by the end of the year — a tally Netflix has now lowered to a range from 4.75 million to 5.25 million. Netflix ended the quarter with 3.43 net new subs since the beginning of the year.

"I continue to believe that increasing competition and ubiquitous content will drive consumers to look at other options," Wold wrote in an email. "And with a minimum of $5 billion in content commitments and a greater amount of spend on original programming, this poses a risk to the entire business model."

Wold said management's desire to maintain international expansion will continue to undermine the bottom line indefinitely.

"I continue to believe earnings expectations for the next few years remain too aggressive," Wold said, adding that the disc margin improvement was likely due more to a beneficial mix of discs shipped or possibly less usage of the subscriptions ahead of possible cancellations.

Investors concurred, sending Netflix shares down more than 16% in after-hours trading.

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