Netflix reported generally strong subscriber and financial reports for the first quarter of 2014, with nearly 48.35 million streaming members around the world, 46.14 million of whom were paying, and 35.67 million streaming U.S. members, of whom 34.38 million were paying.
Total revenue for the quarter ending March 31, 2014 was $1.066 billion, with $98 million in operating income, and earnings per share were $0.86, beating Wall Street estimates.
The company also announced that it would increase streaming prices by $1 or $2 for new members but “existing members would stay at current pricing [e.g. $7.99 in the U.S.] for a generous time period.”
Prior to the earnings release, Wall Street analysts had been predicting $0.81 earnings per share, according to the Wall Street Journal, while Estimize.com had been predicting about $0.84 earnings per share on $1.272 billion in revenue based on 52 analysts.
The company’s stock has swung widely in recent months as investors had pulled out of high-growth tech stocks amid concerns that these tech stocks were overvalued. After a sharp run-up last year the stock dropped from $368.17 on Dec. 31 to a low of $326.27 on April 15.
It closed at $348.91 on April 21 prior to the earnings release and was trading up at $372.55 at 4:32 p.m. ET after the release of the earnings at 4:05 p.m.
In a letter to shareholders, Netflix CEO Reed Hastings and CFO David Wells, reported strong membership gains with “our net additions for Q1 were 0.22 million more than prior year Q1,” but cautioned that this growth would slow in the upcoming second quarter.
“As we’ve discussed previously, U.S. net additions in Q2 will generally be lower than in the prior year Q2, even in a year with full year growth, due to increased seasonality. This Q2, we expect our domestic net additions to be about 0.11 million below the prior year Q2.”
They added that “international performance in Q1 was also strong. Membership grew by 1.75 million, bringing our international total to 12.7 million members with 72% more net additions than prior year Q1.”
As a result their “present international segment is on a path to achieve profitability this year,” they noted.
In the letter to shareholders and during the video interview Hastings and Wells came out strongly in favor of network neutrality and against the Comcast/Time Warner Cable deal.
“The Internet faces a long term threat from the largest ISPs driving up profits for themselves and costs for everyone else as detailed in our recent blog post,” Hastings and Wells wrote. “If the Comcast and Time Warner Cable merger is approved, the combined company’s footprint will pass over 60 percent of U.S. broadband households, after the proposed divestiture, with most of those homes having Comcast as the only option for truly high-speed broadband (>10Mbps). As DSL fades in favor of cable Internet, Comcast could control high-speed broadband to the majority of American homes. Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix. The combined company would possess even more anticompetitive leverage to charge arbitrary interconnection tolls for access to their customers. For this reason, Netflix opposes this merger.”
During the interview, Hastings said that “we did end up paying Comcast to improve” the customer experience. “We don’t think should have to but in short term we felt like we had no choice,” given the deterioration of the customer experience in the six months prior to the deal, he added.
Those streaming issues significantly improved after the deal, he explained.
In terms of the price increase, Hastings and chief content officer Ted Sarandos said that much of the increase would go to their programming budget.
They also noted that existing subscribers would be protected from price increases for one to two years, with the final length still to be determined.
As a result, the revenue increases would be initially modest.
Sarandos and Well reiterated past statements that spending on originals would double but still remain less than 10% of the content budget.
Hastings also stressed that growing popularity of Amazon was actually good for the industry. He described Amazon as a “complementary service” and stressed that Netflix was included on Amazon’s new Fire TV box.
“It is a great relationship all around,” he said.
“It is very much not a zero sum game” because stronger players like Amazon and Netflix encourage more people to subscribe and “the bigger that eco system gets,” he added.