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Netflix Tops Expectations, Posts $31.8M Profit, Adds 1.3M Domestic Subs

21 Oct, 2013 By: Erik Gruenwedel

Streaming pioneer tops 40 million subscribers globally, with users streaming 5 billion hours of content in the quarter

Netflix Oct. 21 again thwarted naysayers who thought it couldn’t possibly continue to beat expectations and support its soaring stock price with strong financials.

The company generated more than $31.8 million in third-quarter (ended Sept. 30) profit on revenue of $1.11 billion. Profit was nearly quadruple the $7.6 million in net income during the previous-year period.

Los Gatos, Calif.-based Netflix finished the quarter with more than 40 million subscribers globally, which included 31.09 million domestic subscribers — 29.93 million paying. It added 1.44 million international subs to top 9.1 million, including 8.08 million paying.

Netflix is projecting to add 6 million net domestic subscribers overall in 2013 — a growth rate, if continued in 2014 would sustain current operating margins, according to CEO Reed Hastings.

“If we are able to continue 6 million [net adds) next year, we believe we can keep the margin continuing to grow,” he said in the video webcast, which CFO David Wells said also includes increased content spending. 

Domestic streaming generated $166 million in contribution profit (23.7% margin) on revenue of $701 million, while international operations lost $74 million on revenue of $183 million.

Netflix’s flagship by-mail disc-rental service again proved an ace, generating profit of $107 million (47.1% margin) on revenue of about $227 million. With the postal rate hike announcement in September, Netflix anticipates a rate increase in January of 3 cents each way or $3 million to $4 million in additional expenses per quarter in 2014.

“The huge selection we offer on [disc], including all the HBO and other pay-TV series, continues to be a source of satisfaction for 7.15 million domestic households,” Hastings co-wrote in the investor newsletter.

Wells said Netflix currently operates 39 disc distribution centers nationally — down from about 50 at the by-mail disc rental peak. He said that despite fewer distribution centers Netflix disc subs could still count on their rentals arriving within one day throughout the country.

“Even if we drop a distribution center we will add a shuttle, which still gets the mail to that local postal center, so it's not a one-to-one relationship when we close a distribution center that folks in that area may get two-day service,” Wells said.

Upping Original Content Spending

Netflix plans to significantly increase current 10% spending by as much as 20% on both original and third-party licensed content heading into 2014, executives said.

Notably, Netflix’s brass said women’s prison dramedy, “Orange is the New Black,” from Lionsgate has been its most-watched original program — quietly distancing itself from the Emmy-winning and widely marketed “House of Cards.”

CCO Ted Sarandos said Netflix is also considering launching follow-ups of original series faster than the industry standard of 12 months between seasons.

“We are very excited about trying to do that, in terms of when we go to into a show, particularly if we committed to multiple seasons upfront, then we would accelerate the production schedule,” Sarandos said. “But again we don't want to loose track of quality. So we want to leave time for the writing to be as best as it can be and also for the talent to rest in between seasons. But ideally we would like to reduce those cycle times between seasons beyond the tighter than the one year we are seeing today.”

As with its other originals and pending newcomers, Netflix plans to up marketing around the launch of second seasons of “Cards,” “New Black” and “Hemlock Grove,” by promoting the first seasons heavily. New shows include “Sense8,” and a yet untitled series from creators Todd Kessler, Daniel Zelman and Glenn Kessler (collectively known as “KZK”), who produced “Damages,” starring Glenn Close and Rose Byrne.

“HBO, as an example, about 40% of their spend is on original programming. So there is a big gap from where we are to where we could be,” Wells said.

CEO Hastings said that Netflix would also consider owning — not licensing — original content going forward.

“It’s something we would be much more comfortable doing today and could, particularly considering the complexity of new territories as we open them up,” he said.

Netflix Targeting MVPDs — Domestic and Foreign

Netflix is eager to follow up inclusion of its SVOD service on Britain’s cable operator Virgin Media with similar offerings (requiring separate subscription) on other foreign and some regional domestic multichannel video program distributors such as cable, satellite, fiber optic and telecommunication.

Hastings said he subscribes to Comcast’s X1 broadband platform whereby he can listen to music on Pandora. He said he would like to access Netflix from X1 as well — a reality that isn’t available yet due to ongoing competitive concerns from MVPDs.

“I am sure we could be on a Comcast box. So the real question is, we have to figure out deal terms that make sense for both sides. And it's been an ongoing discussion with many of the MVPDs and not just limited to Comcast. We are definitely making some progress,” Hastings said.

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