Netflix Q1 Solid, Raises Guidance, Stock Down

Netflix (NFLX) reported solid Q1 sales, blew out expected profits, and met the high end of its guidance for subscriber growth. It also raised full-year guidance across the board — sales, profits, and subscriber growth.

But shares are down 6% in after-hours trading. Why? We’re not completely sure. (Let us know if you have ideas.)

Perhaps investors were looking for more growth this quarter. Or maybe they’re concerned about Netflix’s gross margin, which dipped to 34.2% from 35.2% in Q4. Perhaps we’ll get a better sense from the call, which we’ll cover live at 6 p.m. ET. (Update: Not really. Seems that stock has just gone up a LOT, and some weren’t impressed with today’s results and guidance.)

Netflix’s Q2 growth does look relatively limp — the company expects to sign up just 100,000 to 300,000 subscribers, a huge drop-off in growth from Q1, when it added 920,000 subs. But that’s guidance that Citi analyst Mark Mahaney thought would be perceived as “positive,” so that might not be it. And as Netflix CFO Barry McCarthy explained on the call, Q2 is the company’s slowest quarter every year.

On the call, CEO Reed Hastings said the company was working on more streaming deals — both content and gadgets.

LIVE Conference call notes; refresh for the latest

6:02 Standard disclaimers etc.

6:03 Reed: Goal is to grow subs and earnings every year while moving into streaming video. On track for record 2009. Perfecting automated inspection for returned disc, rolling out nationwide.

6:06 Also testing Saturday shipping. Over 2009 will be expanding that program to all 58 shipping centres.

6:07 If we can get Blu-ray cost premium in line, can be more aggressive promoting adoption. This is critical time period for Blu-ray. Hope to be able to make more progress this year.

6:08 Bundling discs and Internet gives NFLX competitive advantage as streaming gains traction. Competition: Rise of kiosks have been notable. Kiosk will likely be #1 competitor by end of year. More kiosks than movie stores now. Long-term effects of $1 new-release DVD rental not good for NFLX or industry.

6:09 New releases less than 1/3 of NFLX rentals. Expect to have a record year.

6:10 Not hard to believe that online video will grow substantially every year for a very long time.

6:12 Since networks have never missed an opportunity to expand distribution, networks will look to grow distribution via Internet retailers such as Netflix. This will help grow those networks’ revenues by opening up new audiences. Benefit to content creators. Looking to a day when plentiful movie and TV show content to streaming. By us carrying entire channels like Starz Play, or content like NBC etc., we will simply be a fourth option for consumers and a fourth and growing revenue source for networks and studios.

6:14 Continuing to push up streaming spending consistent with earnings goals. Now talking about social and community. (Oh god.)

6:15 Internet TV is about catering to Internet generation! Social side of Internet is evolving rapidly. Old video grid will have less relevance. Long-term outlook for Internet TV is very promising.

6:16 CFO Barry McCarthy here to go over numbers from release.

6:18 Overall disc usage on par with expectations and historical usage. Thus sequential decline in GM which we guided to.

6:20 Now talking about Q2 and full year guidance. Those familiar with business know slower sub growth and higher churn in Q2. Then better in Q3 and Q4. Assuming GM will decline in response to another postal rate increase in May.

6:21 Sub. growth rates should plateau at current levels, EPS should slow as spend more on streaming. We’ll continue to manage business with one eye on incremental profit and one eye on faster growth.

6:23 Now Q&A.

6:23 Will Blu-ray price increases be able to cancel out ARPU declines? We’ll continue to see ARPU decline as long as small plans exist. (But those plans have higher GM.) Rate of decline will slow though.

6:24 “Tremendous amount” of streaming gadget deals in the pipeline. Working with everyone you’d expect us to work with.

6:25 Sub growth slowed back half: Historical seasonal pattern; by way of reminder, slow growth in Q2, faster Q3, faster Q4, fastest Q1. Q4 tends to be back-end loaded, Q1 tends to be front-end loaded. Pattern of growth very similar than expected. Slightly more momentum.

6:26 Amortization of content library fell. Why? Investment we made in improving merchandising on the site, monetizing long tail content, contributing to margin expansion.

6:27 Why raising full year so much? Incrementally confident.

[sorry, missed a few]

6:35 No new marketing efficiencies, weak economic environment, relatively low cost of ads.

6:40 Hulu, Pay per view, all three of us are 3 drops of water in an ocean of watching TV. So we hardly notice each other. Mostly all trying to figure out what fraction of giant ocean of TV viewing can we capture by creating better experiences. Some competition between us, but for now we’re all so tiny relative to TV viewing.

6:43 Xbox deal exclusive? Exclusive for us currently. Not commenting on other terms, such as how long.

6:49 Wow, terrible audio interference.

6:56 Call over.

Key Stats:

  • Q1 Revenue: $394.1 million vs. $390.1 million consensus
  • Q1 EPS: $0.37 vs. $0.31 consensus
  • Q1 Subs: 10.3 million vs. 10.1-10.3 million guidance, whispers above 10.4 million
  • Q2 Revenue: $403-409 million vs. $407.7 million consensus
  • Q2 EPS: $0.44-0.53 vs. $0.47 consensus
  • Q2 Subs: 10.4-10.6 million vs. 10.25-10.5 million midpoint “neutral” (Citi)
  • FY Revenue: $1.63-1.67 billion vs. $1.64 billion consensus
  • FY EPS: $1.56-1.72 vs. $1.60 consensus
  • FY Subs: 11.2-11.8 million vs. 10.6-11.3 million previous guidance, 10.95-11.25 million “neutral” (Citi)


Netflix reports Q1 earnings today after the bell. Join us for LIVE analysis, beginning at 4 p.m. ET, and live coverage of its earnings call, beginning at 6 p.m. ET.

The DVD rental service should easily come in at the high end of its guidance today, and should raise full-year guidance, which is a low hurdle. (Wall Street has already raised consensus above the high end of the forecast Netflix issued in January.) Our only question: Will the raise be big enough to impress investors — who have already sent the stock up 55% this year?

For now, let’s focus on subscriber growth, the only stat we got a mid-quarter update on.

In January, as part of Netflix’s Q4 earnings report, the company told investors it expected to finish Q1 with 10.1 million to 10.3 million subs, representing 700,000 to 900,000 net additions. By mid-February, it had already signed up 600,000 subs to hit 10 million total. That means all Netflix had to do was sign up 300,000 more to hit the high end of its Q1 guidance. Easy. Even 10.5 million is possible.

And the rest of the year? In January, Netflix expected to finish the year with 10.6 million to 11.3 million subs, representing 1.2 million to 1.9 million net additions. If Netflix hit 10.3 subs during Q1, that would mean another 650,000 net additions over three quarters to reach the 10.95 million midpoint. That’s easy, too: Last year, it signed up 1.1 million subs during that period. So even if growth fell by 40% — unlikely — it’d pass that test.

Sure, Netflix has tough comps — it got a boost last year as Blockbuster flamed out as a competitor and as it rolled out digital streaming products. But the hurdle is still too easy. So Netflix will likely raise expectations.

How much will be enough? Citi’s Mark Mahaney says in a note that a “positive” new midpoint would be more than 11.25 million year-end subs. Assuming a similar range, a good new range could be 10.9 million to 11.6 million subs.

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