Netflix Rebounds in Q4, Recovers Most Of Its Lost Subs

Netflix

Rebounding from the subscriber losses and investor dissonance that troubled it last fall, Netflix (NSDQ: NFLX) reported better than expected earnings of $41 million or $0.73 per share Wednesday, with revenue rising 43 percent to $876.

Overall, profits were down 13 percent, but the online movie rental company beat analysts’ expectations of $0.54 a share and $857 million.

Netflix recovered much of its lost subscriber count from its troubled third quarter, matching a loss of nearly 800,000 subscribers with the addition of 610,000 new members in the fourth quarter. Its ranks now stand at 24.4 million. In after-hours trading, the company’s stock was up 13.3 percent to $107.66 a share about one hour after issuing its fourth-quarter results to investors.

In a pre-call letter to shareholders, Netflix CEO Reed Hastings and CFO David Wells noted the impact of streaming, which contributed $52 million in profit to Netflix’s bottom line during the fourth quarter on margins of 10.9 percent. Netlfix tallied nearly 21.7 million U.S. streaming subscriptions for the fourth quarter. (Later, in a conference call with investors, the Netflix officials revealed they no longer plan to promote the growth of the DVD side of their business.)

An additional 380,000 streaming subscriptions were reported for international territories, bringing the company’s foreign total to 1.86 million. Building that international business, however, resulted in a $60 million hit to the company’s bottom line for the quarter, negating the domestic windfall.

With the decline of the DVD business, and Netflix ramping up to be a global streaming brand that competes head-on with pay cable endeavors like HBO Go, Hastings and Wells told investors they should expect modest quarterly losses during 2012, as well as losses for the full calendar year.

“The global opportunity for streaming TV shows and movies becomes more compelling every year with the rise of smart TVs and faster broadband,” the Netflix executives wrote. “With our streaming growth, Netflix is leading the development of internet TV.”

Hastings and Wells also addressed the issue of new competition: “We expect Amazon (NSDQ: AMZN) to continue to offer their video service as a free extra with [Amazon Prime] domestically but also to brand their video subscription offering as a standalone service at a price less than ours.”

The more compelling competitive threat, they said, comes from HBO Go.

“As we’ve often said, we see the biggest long term threat as TV Everywhere, and in particular, HBO GO, the leading implementation of TV Everywhere to date. HBO has some great content, particularly their original series, but today for most people it is locked behind a linear interface, or at best, behind a DVR interface and in all cases tethered to a linear subscription plan. As HBO GO grows and becomes the primary way that consumers experience HBO, it will become a much more effective competitor for viewing time.”

Hastings and Wells pushed aside suggestions that Netflix will struggle mightily once content from its un-renewed deal with Starz finally leaves the service next month.

A deal with pay cable service Epix will deliver such recent titles as Hugo, The Adventures of Tintin and Rango to the service, as well as 2011 box-office hits like Thor, Transformers 3 and Captain America, they noted. Meanwhile, fruit from a DreamWorks Animation pact will arrive in 2013. There are also content deals with smaller studios like Relativity and Open Road to consider, as well as original series productions. Steve Van Zandt’s mystery drama Lilyhammer launches in February, for example, and Kevin Spacey’s politically themed House of Games is also on deck.

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