Netflix Gains Two Million U.S. Subs in Q1

UPDATED: Sees faster sub growth than a year earlier as revenue tops $1 billion but net profits slip to $3 million

By George Winslow -- Broadcasting & Cable, 4/22/2013 4:25:50 PM

UPDATED: 7:15 p.m. ET

With analysts closely watching Netflix's first-quarter earnings report for signs that the company's House of Cards original series proved to be a good investment, the firm reported that global subscribers grew by three million, with 2.03 million new U.S. streaming customers.

That was faster growth than a year ago in the same period, when Netflix added 1.74 million new U.S. streaming customers. The company now has about 29.17 million U.S. streaming members.

Overall revenue grew to just over $1.02 billion, but net income was only $3 million, or five cents a share. However, earnings per share would have been 31 cents, if the one-time $25 million loss on extinguishment of debt was removed.

Analysts have been expecting around $1 billion in revenue and earnings of 18 cents to 19 cents a share according to the Wall Street Journal.

While the company said it was very pleased with the results of its original series, the letter noted that as they "continue to focus on exclusive and curated content, our willingness to pay for non-exclusive, bulk content deals declines. At the end of May we'll be allowing our broad Viacom Networks deal for Nickelodeon, BET, and MTV content to expire. We are in discussions with them about licensing particular shows but have yet to conclude a deal. We continue to do lots of other business with Viacom around the world, such as our exclusive Pay1 deal for Paramount titles in Canada."

Netflix has repeatedly said it would not be releasing ratings or usage data for House of Cards and the earnings release didn't supply any hard data.

In a letter to shareholders, the company did say that "the global viewing and high level of engagement with the show increased our confidence in our ability to pick shows Netflix members will embrace and to pick partners skilled at delivering a great series."

The letter also noted that "our decision to launch all episodes at once created enormous media and social buzz" and reinforced "our brand attribute of giving consumers complete control over how and when they enjoy their entertainment. Some investors worried that the House of Cards fans would take advantage of our free trial, watch the show, and then cancel. However, there was very little free-trial gaming -- less than 8,000 people did this -- out of millions of free trials in the quarter."

The report was the first financial data the company has released since it launched House of Cards available in February. While Netflix stock has more than tripled since its one year low in August 2012, some analysts had expressed concerns about the company's programming expenses, which reduced profits in 2012.

During the conference call, Netflix CEO Reed Hastings and CFO David Wells provided some additional details on their content plans.

Wells explained that their program content obligations grew from $5.6 billion at the end of 2012 to about $5.7 billion at the end of March of 2013.

The executives once again stressed that they had no firm number of originals that they wanted to achieve. This year Netflix would offer "six or seven seasons" of originals," Hastings said. "We will take that up a little next year based on what we have learned."

"If they are as wildly successful as the first shows" it might be possible that they could grow that to "20 or more" but "it all depends on the success," he added.

Hastings reiterated their belief that the originals would not produce major spikes in subscription rates and their belief that the upcoming launch of Arrested Development would not have a major impact on subscriber rates in the second quarter of 2013.

House of Cards had not, for example, produced a big spike in the week before its launch. "It was a nice impact but a gentle impact [and] not overnight," he said.

Original content expenses were growing at double digit rates, but Hastings noted that they still comprised a "modest" amount of their programming costs.

In terms of other programming, Netflix would continue to move away from non-exclusive programming deals and place less emphasis on programming that is available elsewhere on cable and satellite, Hastings added.

Increased competition, however, was boosting overall prices. "Amazon has been more aggressive and made content owners happy and the prices to us higher than would otherwise be the case," Hastings said.

In response to a question about possibly lowering subscription prices to drive growth, Hastings said they had no plans to discount subscriber rates and reiterated their belief that their long-term growth prospects were higher than HBO.

He argued that the "total available market" is about "two or three times HBO's linear service of about 30 million...So our guess for the market....is 60 million to 90 million."

Reed also addressed questions about closer alliances with Internet Service Providers (ISPs) via Netflix's Open Connect effort. "We think that in the next year or two we will be working with all the major IPS to get the benefits," he said.

He discounted, however, the idea that such alliances would lead to discounted offerings for new Netflix subscribers, with IPSs offering Netflix free for a few months with a new subscription, much as cable operators do today with HBO and other premium channels. "We are more likely to make it [Open Connect] work better, than to make it more complex with those kinds of interactions," he said.