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Netflix Posts $5M Loss, Adds Nearly 3M Subs

23 Apr, 2012 By: Erik Gruenwedel

Service expects to add 7 million domestic streaming subs in 2012

Netflix April 23 reported a first-quarter (ended March 31) net loss of $5 million (its first since 2005) while adding 2.95 million streaming subscribers globally, including 1.74 million in the United States.

The loss was a drop from net income of $60 million during the previous-year period. Globalrevenue reached $870 million, up 21% from revenue of $719 million during the same period last year.

Netflix ended the quarter with 23.4 million domestic streaming subscribers, in addition to more than 3 million international subs.

In a call with analysts, CEO Reed Hastings said the international streaming business has exceeded expectations in Canada, the United Kingdom and Ireland — less so in Latin America.

“In Latin America, we’ll get there eventually, but it is going to be longer [than the two-year projection] and harder than we initially thought,” he said.

Netflix is planning on expanding international streaming in Q4 into an undisclosed established foreign market, but it will not be an emerging market as is Latin America.

The company expects to add 7 million net domestic streaming subscribers in 2012 — the same tally generated in 2010 — representing slower growth.

“The business is performing exactly as we had hoped,” Hastings said, adding that increased household broadband penetration, better content and record viewing times should help Netflix reach that 7 million growth goal.

CFO David Wells said the earliest indicators that Netflix will or won’t be able to reach 7 million new subs in 2012 would be the sub growth data from Q2 into Q3. He said there is a higher churn rate among streaming only subs than DVD-only.

“It is easier to come in and out of [streaming] than the DVD and having the [discs] at home and having to mail them [back],” Wells said.

Hastings said the first quarter generated all-time records for total streaming viewing and streaming per subscriber.

Netflix’s disc rental service lost 1 million subs, lowering its base to more than 10 million members. The latter includes 7 million hybrid subs that rent both physical and digital content. The waning disc rental segment nonetheless generated operating profit of $146 million — more than twice the operating income ($67 million) of domestic streaming. He said the company has no plans to sell its disc business.

Indeed, Wells said the number of hybrid (disc and streaming) subs dropping the service is declining as members deciding whether or not they want to pay $15.99 monthly have subsided.

“Fewer and fewer [subs have] to make that decision,” Wells said.

International operations, which include Latin America, the Caribbean, Mexico, the United Kingdom and Ireland and are streaming only, lost more than $103 million.

Hastings said Netflix would continue to aggressively acquire content, spending slightly less than the rate of revenue growth. Revenue growth was 46% year-over-year, but declined almost 1% from Q4. The executive said Netflix’s original comedy, “Lilyhammer,” was “quite successful” for the amount of the investment, which he said parallels other premium content acquisitions such as “Breaking Bad.”

The CEO said Netflix would actively seek studio license deals when they come up for renewal with pay-TV channels in 2014 and 2015.

Hastings said the service has no plans of offering price-tiered streaming services in an effort to acquire premium content.

At the end of the first quarter, Netflix’s content bill for the year stands at $3.7 billion — up 95% from license obligations of $1.8 billion a year ago.

“We think we can produce [original] content at no greater cost per hour of viewing than it would cost to get licensed content,” he said.

When asked if he thinks Amazon will separate its Prime streaming service into a standalone competitor, Hastings said he believes so but didn’t know when that might happen.

The CEO said he remained concerned with Comcast’s Xfinity Streampix and net neutrality due to the cable operator’s
ability to downsize data caps to subscribers. Comcast imposes a 250GB cap to subs, which would allow more than 8 hours a day to stream Netflix — eight times what Netflix subs do currently.

“The concerns we have are with the principles of net neutrality,” Hastings said. “Obviously, with a high enough data cap it doesn’t matter. But if something is accepted with one cap, you may find that next year the cap is much lower. But in the near term it is not an issue.”

Finally, when asked if the Q1 sub growth indicated Netflix’s return from the negative backlash following last summer’s price hike announcement and related PR snafus, Hastings said Netflix’s brand recovery was partway complete, with a three-year time frame still in play.

“We’re feeling pretty good about the progress we’ve made,” he said.

The results sent Netflix shares tumbling more than 14% to $87 a share in after-hours trading.

About the Author: Erik Gruenwedel

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