Netflix reports record $9.9 million Q1 earnings
By Jennifer Netherby -- Video Business,04/18/2007
APRIL 18 | Online DVD retailer Netflix saw its stock fall 8% Wednesday morning after the company reduced its subscriber and earnings outlook for the year, citing tough competition from Blockbuster Online.
For the first quarter, Netflix met the bottom end of its target, with earnings of $9.9 million, more than double earnings from the same period the previous year. Revenue was up 36% to $305.3 million.
Despite the record results, company execs called the results disappointing.
During a morning earnings conference call, the usually boastful CEO Reed Hastings acknowledged that Blockbuster’s Total Access program, which allows members to rent movies online and in stores, was allowing the company to significantly grow its share of the online rental business.
Blockbuster’s Total Access program has driven an explosion in online DVD rentals, growing the business from 6 million subscribers last year to 10 million today, Hastings said.
“Our thesis that online DVD rental would become very large appears more and more credible,” Hastings said. “Our thesis that more subscribers would choose Netflix seems more open to question, at least for now.”
Hastings predicted that Blockbuster isn’t making money on Total Access, which he said would force the company to eventually raise its prices, but he said he doesn’t think that will happen this year.
Netflix still has the bulk of online subscribers. It closed the first quarter with 6.8 million subscribers, growing its base 40% over the previous year. The company added 481,000 new subscribers during the quarter, less than the 687,000 subscribers it added the previous year.
But going forward, Netflix expects Blockbuster to be a drag on Netflix subscriber growth. Netflix said it expects to lose as many subscribers in the second quarter as it gains because of the tough competition.
Netflix cut its full-year subscriber outlook to 7.3 million to 7.8 million members by the end of 2007, down from an earlier target of 8 million to 8.4 million members. The company also revised its revenue outlook to $1.21 billion to $1.26 billion for the year, down from its previous target of $1.25 billion to $1.3 billion.
Netflix didn’t rule out cutting its own prices to drive subscribers.
But chief financial officer Barry McCarthy said the company is focused on profits and not driving subscribers, a shift in strategy from the last six months when it emphasized subscriber growth over earnings.
McCarthy said the reason is that it would lose money on those new subscribers. Instead, the company will wait for Blockbuster to raise prices, which Netflix believes will spur its own growth.
Subscriber acquisition costs were $47.46, up from $38.47 the previous first quarter.
Churn, the percent of customers leaving the service, was 4.4%, up from 4.1% in first-quarter 2006.
Netflix said its board of directors had approved a stock repurchase of up to $100 million by the end of the year.
The company is continuing to build its online rental streaming business, now offering 2,000 movies through its Watch Now service. Since launching in January, the company has delivered more than 1 million streams. (Read our review.)
By year-end, Netflix expects to offer 5,000 movies. Hastings said that by 2008, the retailer expects to have a way to deliver movie streams directly to the TV without a PC. He declined to say how the company will do that, beyond saying the company is working on a variety of partnerships.
On Monday, Netflix said it hired Replay TV founder Anthony Wood as its first VP of Internet TV.
Netflix was scheduled to report earnings Monday, but on Tuesday afternoon bumped it up to the following morning, without explanation.
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| Submitted by: | Rick Hanley 4/18/2007 4:48:46 PM PT |
| Location: | U.S. |
| Occupation: | Head Hunter |
Correction:
Was:
The range is from negative 100 million to positive 100 million in the net sub change for the 2nd quarter.
S/B:
The range is from negative 100 thousand to positive 100 thousand in the net sub change for the 2nd quarter.
| Submitted by: | Rick Hanley 4/18/2007 11:28:22 AM PT |
| Location: | U.S. |
| Occupation: | Head Hunter |
Netflix – 1st Quarter, 2007 Results and Conference Call
From call: Q2 guidance for subscribers is possibly flat at 6.7 to 6.9 million subscribers.
The range is from negative 100 million to positive 100 million in the net sub change for the 2nd quarter.
A growth company can’t have 0 growth. That will upset some people. Aligned with that thought is that Reed should have dropped the 20,000,000 subscriber projection for 2010 - 2012 a long time ago. It was dishonest before and now it is a joke.
The company is 40% owned by management and Legg Mason so 40% of the announced $100,000,000 buyback benefits them. Good or bad for everyone else? I don’t know. No better use for the cash? – very interesting. [I suppose that, technically, the whole $100,000,000 could go to insiders? Hoag/TCV owns over $200,000,000 of the stock.]
Blockbuster isn’t even close to being the whole competitive problem that Netflix has.
At some point last year, Netflix had 20% of fulfillment due to TV series. The broadcasters are taking Internet distribution of TV shows back in house and Apple and others are now doing a huge volume with TV shows (many times more than the unit count for movies; for one thing, they are cheap and easy to do by download).
Many people are now in the business of distributing catalog films. At one time, Netflix virtually had it to themselves. This dynamic, in particular, has really taken off over the last several months.
Profitability attracts competition. Reed has been a skilled marketer but sometimes attention brings problems.
From Tech Trader (WSJ): !!!
...A scarier number - which you have to calculate - is the soaring cost of net subscriber additions: each net new subscriber cost the company $150 in the latest quarter, up from $101 in the fourth quarter and $77 in the year-ago quarter...
[Um, maybe expenses are not heading down as the analyst from Lehman Brothers (Doug Anmuth) said. Unless there is some possible way to pay the workers in the distribution centers less money. Actually, the vast majority of Netflix workers are in the distribution centers and they must handle, physically, every DVD that comes and goes. No scaling possible. Advertising can only grow as it gets progressively harder to get the next subscriber.]
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