The Netflix numbers are out, and while the company beat revenue and earnings expectations, it lost U.S. subscribers and had terrible guidance.The stock is getting smashed, falling 21% 28% in after hours trading.
Here are the key numbers for Netflix, versus Wall Street’s expectations.
- Revenue: $822 million vs. $811 million expected
- EPS: $1.16 vs. $0.94
- Q4 Revenue guidance: $841 million-$875 million ($858 million midpoint) vs. $923 million expected
- Q4 EPS: $0.36-$0.70 ($0.53 midpoint) vs. $1.09 expected
- Total Subscribers: 25.27 million vs. 25.25 million
- Domestic subs: 23.79 million vs. 24.5 million (Netflix lost 800,000 subs for the quarter.)
- International subs: 1.48 million vs. 1.25 million
- One other crazy number in the release: Netflix spent $39.6 million buying 182,000 shares at an average price of $218. The shares are at $86 in the after-hours trading thanks to this report.
The good news is Netflix will halt stock buybacks. Bad news is that its doing that because it’s going to be losing money next year.
That’s right, the company says it could be unprofitable for a “few quarters” starting in Q1 2012.
Here’s the key section from its earnings letter. Our emphasis is added:
We think that $7.99 for unlimited streaming and $7.99 for unlimited DVD are both very aggressive low prices, relative to competition and to the value of the services, and they are the right place for Netflix to be in the long term. What we misjudged was how quickly to move there. We compounded the problem with our lack of explanation about the rising cost of the expansion of streaming content, and steady DVD costs, so that absent that explanation, many perceived us as greedy. Finally, we announced and then retracted a separate brand for DVD. While this branding incident further dented our reputation, and caused a temporary cancellation surge, compared to our price change, its impact was relatively minor. Our primary issue is many of our long‐term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected.
Because of this, our revenue and profits in Q4 will be lower than we had anticipated, but we’ll remain profitable on a global basis. In Q1’12 we’ll be launching in the UK and Ireland, as we had planned. For a few quarters starting in Q1, we expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and Technology & Development. After launching the UK and Ireland, we will pause on opening new international markets until we return to global profitability. We plan to do that by increasing our global streaming subscriber base faster than we increase our costs.
- We’ve been aggressively increasing our content spending, and in 2012 will nearly double what we’ve spent this year, putting us almost at par with what HBO, the biggest of the premium TV networks, spends in the U.S. and making the range and quality of content on Netflix the best it has ever been.
- Overall for the [fourth] quarter we expect slightly negative streaming net additions.
- We have the Starz offering within our service, and it is currently running about 6% of viewing hours because we have added so many other movies and TV shows (with no bias one way or the other in our merchandising).
- From this perspective, Netflix has about 10 times the streaming content selection of full Starz, in terms of what consumers actually choose to watch.
- We have analysed all the video content offered through Amazon Prime, including the TV programs announced but not yet live. We have essentially all of this content on Netflix, and that content contributes a small fraction of Netflix viewing. Specifically, the duplicative Amazon content that is available on Netflix represents more than half of hours viewed for only 2% of our subscribers. Therefore, when evaluating Amazon Prime as a competitive stand‐alone offering, this low content selection explains why we have not seen much usage of Amazon Prime in our research.
- We’re pleased to report that we have over 1 million Canadian members, and we made a small contribution profit in Q3 in Canada.
- We’ve added $1.34 billion of streaming content assets to our balance sheet since the start of 2011.
Here’s the letter from Netflix to investors, below this is our notes from the company’s earnings Q&A.
Live blog of the earnings call:
6:02: Why do you think December will be positive?
Reed: Second wave of cancellations from price increase in September and October as they become more aware. That has been declining. We have substantially less cancels then we did a few weeks ago.
In Q4 in December, more devices get sold, so our expectations based on prior years expectations.
6:04: Why not discount the hybrid model of streaming?
Reed: Future is streaming. If were were to offer a discount it would be on streaming. But we think our price is fair.
6:05: Reed: Focus for us is building back brand strength. To do that is same steps of the last 10 years. Improve service quarter after quarter. We will invest in content. It’s exciting to fill out that content.
Can you provide apples to apples comp for subscribers?
David Wells: Sub guidance up slightly 28.3 million we ended Q3 with. From hybrid … streaming only to be up substantially, DVD up slightly, both to be down.
6:06: Reed: we focus on net adds, not churn. We look at total growth. We make it easy for people to leave and come back.
6:07: Can you give more detail on domestic streaming margins?
DW: In the short run, adding streaming content, we anticipate investing in that. We will grow in pace with that. Growth of subs should outpace cost of content.
6:08: What is cost of the bad publicity?
We havent seen neg publicity affected sub acq. costs.
6:09: What was thinking behind Qwikster?
RH: Hard to justify in hindsight. Qwikster became symbol of NFLX not listening. Going forward aggressive on promoting streaming.
6:10: What are margin targets?
RH: I think David answered that. DVD margin is high margin because of US buy once rent forever.
DW: Dont expect further investment in PPE for DVD.
6:12: Can subs level out to sustain a cash cow business for DVDs?
RH: It will probably be like AOL dial-up. Long term residual market. Little fixed costs. Almost all variable costs, postage, labour.
6:12: Historically, DVD monetized back catalogue. How does streaming affect this?
RH: No shift in the DVD mix. Still a catalogue business. People like catalogue depth and breadth.
DW: Netflix is not the only service customers use.
6:13: Thoughts on rights fees?
RH: Industry is a mostly exclusive licensing industry, we’ll do more and more exclusive over time. On EPIx specifically, no comment.
6:14: RH Gross additions are up over a year ago. Orig content may play a part over time.
6:16: Are you oka being rerun television?
RH: Not how I would charactarize it, but not innacurate. That creates great customer experience for episodic shows you may have missed.
6:16: Total off balance sheet commitents for content?
DW: $3.5 billion up from $2.3 billion, writing up $1.1 billion that dont meet criteria for library recognition.
6:17: When you spend double next year, all new cash outlay?
DW: Will include some new some existing deal.
6:18: competition …
RH: Pure on demand, highly personalised, and we’re enormously great value at $7.99 unlimited and unbundled. In terms of competitors, everyone sees this a big oppty. There will be entrants. How do we extend our lead and our benefits?
6:20: How does Dish or Amazon streaming affect you?
RH: Neither one has added an impact.
A pause after UK and Ireland until we get to profitably.
6:22: On international, why expand at a time when U.S. is softening?
RH: In U.S. confident of our streaming. Best content selection ever. In Canada we’re very sucessful, so we’re excited about that. In UK, Lovefilm well run firm, a great competitor, one of a dozen competitors. Look forward to entering market and establishing what a great company we are.
DW: Also, Lovefilm great for DVD, not clear how great it will be for streaming.
6:24: What are the size for first half of 2012 profits?
DW: UK loss akin to loss in Central America.
6:25: What shows work in Latin America?
RH: Just starting to learn those lessons . (Only been there for 45 days). We’ll learn more every quarter.
Mexico and Brazil are two largest markets, as you’d expect.
6:26: How long for regulatory clarity on Fbook connect issue?
RH: Predicting what Congress will do is something we’re not going to do.
6:27: Now they’re taking live call-in questions. (It had been all emails):
6:28: What is value of DVD outside of a cash cow? Any value to keep under umbrella?
RH: Source of profits funding expansion. It’s also a source of satisfaction for customers.
6:29: RH: Our job is to anticipate your questions and answer them in the investor letter. Since you don’t have any questions, we’ll take that as a sign we’re doing a good job.
Wrapping up … I know it’s hard being a shareholder right now, but we’re focused on growing the streaming business and we think we’re doing that well.
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