Netflix Gets Its Earnings Right, Even With a Price Hike

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Netflix Inc. (NASDAQ: NFLX) is out with earnings for its first quarter. The streaming video giant ended its first quarter with more than 48 million global members, and it topped $1 billion in quarterly streaming revenue. Netflix even surprised to the upside on the adds enough that it had higher domestic net additions than in its first quarter of 2013.

Adjusted earnings came in at $0.86 on $1.27 billion in revenue. Thomson Reuters was calling for earnings per share (EPS) of $0.83 and $1.27 billion, versus $0.05 EPS and $1.02 billion a year ago.

Free cash flow in the quarter was $8 million versus net income of $53 million. Other metrics were as follows:

  • Domestic net subscriber adds were 2.25 million — roughly as expected.
  • International net subscriber adds were 1.75 million — better than expected.

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Guidance for the second quarter is as follows:

  • 1.46 million total streaming subscribers — 520,000 from domestic and 940,000 international
  • Total streaming revenue of $1.139 million

One number that will really stand out here is that Netflix is only calling for -$12 million as the loss contribution from international subscribers. This number keeps coming down and it implies that the international operations could be profitable later this year. CEO and Chairman Reed Hastings said:

International revenues currently amount to 25% of our total streaming revenue and we anticipate our international segment to eventually surpass our U.S. market, similar to other Internet firms. … Our present international segment is on a path to achieve profitability this year. However, our substantial expansion into new European markets (with corresponding investments in content and marketing) in the second half of 2014 will keep our expanded international segment at a net loss.

The big news is that Netflix is increasing prices for new subscribers by $1 to $2 later in this quarter. Hastings said,

As expected, we saw limited impact from our January price increase for new members in Ireland (from
€6.99 to €7.99), which included grandfathering all existing members at €6.99 for two years. In the U.S. we have greatly improved our content selection since we introduced our streaming plan in 2010 at $7.99 per month. Our current view is to do a one or two dollar increase, depending on the country, later this quarter for new members only. Existing members would stay at current pricing (e.g. $7.99 in the U.S.) for a generous time period. These changes will enable us to acquire more content and deliver an even better streaming experience.

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Netflix shares rose by 0.8% to $348.49 on the day, but shares were initially up close to 5.5% above $368 in the after-hours trading session. Options traders had been braced for a move of more than 10% in either direction from the earnings reaction based upon volatility pricing.

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