January 27, 2011 / 12:34 AM / 7 years ago

Netflix profit jumps as it adds customers; shares up

6 Min Read

NEW YORK (Reuters) - Netflix Inc. reported blockbuster profit and signed up another 3 million subscribers in the fourth quarter, making clear why the movie rental company worries competitors and delights investors.

Shares of Netflix rose more than 10 percent after its better-than-expected results, marking yet another big jump for a company whose stock has nearly quadrupled in the past year as it shakes up Hollywood's business model.

Netflix's strong profit and bullish outlook on Wednesday showed -- again -- that a company traditionally associated with delivering its customers movies and TV shows through the mail in bright red envelopes is having little trouble keeping up with changing media tastes.

Ahead of Netflix's earnings report, some concerns arose that it could suffer the same fate as F5 Networks last week. Investors have been quick to sell companies that don't surpass expectations by a wide margin this season, particularly companies whose shares have been on a big run.

But Netflix's profit soared past expectations and it added roughly 500,000 more subscribers than analysts on average had expected -- a combination that eased any worries about another F5 reaction.

Netflix's total subscriber base now stands at 20 million, making it the third largest U.S. video subscription service behind only Comcast Corp. and DirecTV.

It said it should end the first quarter with between 21.9 million and 22.8 million domestic subscribers, adding that it expects the addition "to continue to grow in 2011." It also offered first-quarter profit and revenue forecasts ahead of analyst estimates.

"We would say that our huge subscriber growth, fueled by the excitement of watching instantly, impressed even us," Chief Executive Officer Reed Hastings said in a letter to shareholders on Wednesday.

He said that expanding its customer base beyond the United States and Canada was now a priority, saying the company planned to move into a new market this year.

Overall, Netflix posted fourth-quarter earnings of $47.1 million, or 87 cents a share -- up from $30.9 million, or 56 cents a share, a year ago. Analysts had expected earnings of 71 cents a share, according to Thomson Reuters I/B/E/S.

Revenue rose to 34 percent to $596 million.

Consternation Is Natural

In his letter, Hastings addressed the tensions that exist between Netflix and entertainment, media and cable companies. Time Warner Chief Executive Jeffrey Bewkes, for instance, has been a loud critic of Netflix's business plan, at one point comparing the company to a 200 pound chimp rather than an 800 pound gorilla.

Hastings wrote that "some of the consternation about Netflix success is natural," comparing the reaction to that of the broadcast TV industry when an up-and-coming Fox started churning out big hits 20 years ago.

He added, however, that "the evidence is pretty clear that content that is also licensed to Netflix generates more money to its owners that content that is withheld from Netflix."

The Los Gatos, California-based company started in the United States as a mail-in DVD service, but Netflix now says the vast majority of its U.S. subscribers stream content on a range of devices. Recently, it launched a streaming-only subscription plan in the United States, a move that could eventually help it phase out the mail side of its business.

Justin Patterson, analyst at Morgan, Keegan & Co, said that the growth of Netflix's streaming business has resulted in a decline in the costs associated with winning new customers. Netflix spent about 10 percent less in the fourth quarter on marketing than a year ago.

"As their streaming business has grown it's become more about word of mouth and it costs a lot less to market this service because it's built into all these various consumer devices like video consoles and connected TVs," Patterson said.

But concerns abound about the rising cost of paying studios for content -- particularly content that can be streamed. At the moment, its streaming library is tiny compared to its DVD by-mail library.

Netflix already has pricey partnerships with EPIX pay TV, a deal estimated to be worth $1 billion, and NBC Universal.

It has a Starz deal due to expire in 2012 and analysts believe the pricing on that deal may have to at least double. The current deal is thought to be worth around $50 million.

Hastings said in his investor letter that Starz "is one of our most important deals" and that the two sides would be working together to "explore renewal options."

Netflix is also facing an increasingly crowded playing field, with heavy-duty competitors Google Inc and Amazon.com Inc trying to make headway in offering streaming TV shows and movies over the Web.

"There's a lot of firms that could be direct competitors to us," Hastings said on a call with investors. "We've been through a lot of competition in the past. We view that as a natural part of the process."

Netflix shares climbed 10.1 percent to $201.45 after the earnings report. They ended at $183.03 in the Nasdaq session.

Additional reporting by Yinka Adegoke; Editing by Gary Hill

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