Netflix's move to compete against traditional cable-TV channels with original programming such as “House of Cards” is pulling in more subscribers to its Internet video service.
Updated: April 23, 2013 - 9:32 AM
SAN FRANCISCO - Netflix's move to compete against traditional cable-TV channels with original programming is pulling in more subscribers to its Internet video service and winning back investors who doubted the company's ability to cultivate distinctive entertainment.
The skepticism dissipated Monday with the release of Netflix's financial results for the opening three months of the year.
The first-quarter numbers revealed that Netflix Inc. added 2 million U.S. subscribers from January through March — hitting the top end of the target set by the company's management. The growth left Netflix with 29.2 million U.S. subscribers to an $8-per-month service that streams movie and TV shows to Internet-connected devices.
The company picked up another 1 million customers in the dozens of international markets where it streams video, leaving Netflix with 7.1 million streaming subscribers outside the U.S. Even though the international operations are still losing money, Netflix said it will expand into an unidentified European market during the second half of the year.
Netflix's subscriber surge, coupled with signs that the company's profit margins are widening, delighted investors. The company's stock soared $42.48, or 24 percent, to $216.85 after the results came out. If the stock rallies similarly on Tuesday, it will mark the first time Netflix's stock has topped $200 in 19 months.
The stock had plummeted to as low as $52.81 last August as part of a devastating descent that began in July 2011 when Netflix outraged its U.S. subscribers with pricing adjustments. The change resulted in a price increase of as much as 60 percent for customers who wanted dual access to Internet video and a DVD-by-mail option that includes the latest theatrical releases. Investors also fretted as Netflix's losses on an international expansion piled up and the company's bills to license video mounted.
Now, it looks like Netflix CEO Reed Hastings — an object of scorn when the company's stock was plunging — might have known what he was doing all along. In the process, he appears to have regained the luster that made him a Wall Street darling while Netflix's stock was soaring toward its all-time high of nearly $305.
"I don't have a sense of `I told you so,' or something," Hastings said in an interview Monday. "I have a sense of satisfaction that we are doing what we do best, which is steadily improving our service."
The latest strides came in the first quarter when as Netflix eked out a profit of $2.7 million, or 5 cents per share. That contrasted with a loss of $4.6 million, or 8 cents per share, last year.
If not for the costs for refinancing some of Netflix's debt, the company said it would have earned 31 cents per share. That figure topped the average analyst estimate of 18 cents per share.
Revenue rose 18 percent from last year to $1.02 billion — about $7 million above analyst forecasts
Hastings envisions Netflix becoming as popular as any channel on cable or broadcast TV, with as many as 90 million subscribers. To realize that goal, he decided in 2010 that Netflix should become more like Time Warner Inc.'s HBO channel and develop more series that can't be seen anywhere else.
That was a big change for Netflix, which had primarily licensed content that have previously been shown in movie theaters and on traditional television networks.
Netflix took its first major leap in its new direction in early February with the debut of "House of Cards," a critically acclaimed series made exclusively for Netflix. The series, starring Academy Award-winning actor Kevin Spacey, reportedly cost Netflix $100 million, amplifying fears the company was spending more than it could afford.
In another breakthrough, Netflix released all 13 episodes of "House of Cards" at once, raising the risk that many people would just accept the company's standard offer of a free month of service and then quit. But Netflix said fewer than 8,000 people resorted to what it calls "free-trial gaming" during the first quarter.
"I think we're focused on moving toward more and more exclusive content, which reinforces a reason to join Netflix and a reason to subscribe," Hastings said in a Monday conference call with analysts. Without providing specific numbers, Hastings said "House of Cards" had a "nice impact but a gentle impact" on subscriber growth during the first quarter.
Netflix is becoming so popular that too many people using the same account are trying to watch video at the same time. The company currently allows no more than two devices to watch at the same time. Netflix said Monday that is introducing a $12-per-month plan that will allow up to four devices using the same account to watch video. Hastings expects less than 1 percent, or fewer than 292,000, U.S. subscribers to upgrade to the more expensive plan. He also reiterated Netflix's intention to keep its standard steaming option at $8 per month.
Another original series, "Hemlock Grove," came out on Netflix last Friday. Although the horror series didn't get great reviews from TV critics, Netflix said Monday that the viewership of "Hemlock Grove" during its first weekend surpassed the numbers posted by "House of Cards."
Another Netflix exclusive, the resurrection of "Arrested Development," is scheduled for next month.
Neither "Hemlock Grove" nor "Arrested Development" is expected to be compelling enough to overcome a traditional lull that occurs in Netflix's subscriber growth during the spring, when warmer weather and longer daylight hours decrease people's interest in staying indoors to watch TV. The company expects to add 230,000 to 880,000 U.S. subscribers during the current three months ending in June.
As Netflix's Internet video service attracts more customers, the DVD-by-mail that once was the company's foundation continues to crumble. Netflix lost another 240,000 DVD subscribers during the first quarter, pushing the number of customers on that service below 8 million for the first time since 2007. Despite the downturn, the DVD service remains highly profitable.
The company, which is based in Los Gatos, Calif., expects its second-quarter earnings to at least double from the 11 cents per share posted at the same time last year. Management envisions earnings for the current quarter ranging from 23 cents to 48 cents per share. Wall Street is expecting 39 cents a share, according to FactSet.
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