Netflix Stock EXPLODES After It Beats Expectations

Netflix earnings are out!

It’s a beat on the top and bottom line with EPS $0.73 versus $0.55 expected and revenue of $876 million versus $857 million expected.

The stock was up 16% after hours in reaction to the news, but has fallen back and is now up 10%.

Netflix gave midpoint revenue guidance for the first quarter of $860 million with a midpoint guidance for EPS as a loss of $0.33. The revenue beats the street’s guidance estimate which was $848 million. However, the EPS guidance is worse than expected, as the street had a midpoint loss of $0.29.

More to come, click here for latest.

We’ll be live-blogging Netflix’s earnings call starting at 6 p.m.

Below is Netflix’s letter to shareholders, which we’re reading through now.


  • Netflix expects Amazon to offer a standalone streaming service at monthly rate below Netflix.
  • Netflix thinks Hulu isn’t a threat because it charges people and it throws in advertisements.
  • The biggest threat says Netflix is “TV Everywhere” like HBO GO. If popular cable channels figure out a smart streaming plan it’s bad news for Netflix.
  • It predicts the future of TV, and it sounds cool! “Over the next few years, UIs will evolve in astounding ways, such as allowing viewers to watch eight simultaneous games on ESPN, colour coding where the best action is in a given moment or allowing Olympics fans the ability to control their own slow-motion replays. A decade from now, choosing a linear feed from a broadcast grid of 200 channels will seem like using a rotary dial telephone.”
  • The DVD business is dying: “While DVD members declined sharply over the last two quarters, the weekly rate of DVD cancellations has subsided from peak levels in September. Looking out across 2012, we expect continued attrition among our DVD members. Specifically, in Q1, we expect net losses of DVD members of approximately 1.5 million, with the sequential decline moderating in future quarters.”
  • How Netflix will determine if its original programs are a success: “If “Lilyhammer” or “House of Cards” is popular enough on Netflix so that the fees we’ve paid for each are in-line with that of other equally-popular content on Netflix during the same time period, we’ll consider them a success.”

Investor Letter Q4 2011




Hey, this is Kevin Lincoln — I’ll be live blogging the call, which is underway with CFO David Wells and CEO Reed Hastings.

6:02: Can you help us understand the fixed vs variable components in content deals, and how industry is moving?

Bidding in an industry set by cable, so all deals are fixed. Reflects nature of market, been like that for 10+ years.

6:03: What is your appetite for bidding against HBO when studio deals come up for renewal?

I don’t think it’s likely that rights will be decoupled. HBO would want both. To win bidding, have to bid for both as we did with Dreamworks. Will continue to be an active bidder.

6:04 Are you comfortable with current levels of content? Anticipate that a slowdown in acquisitions would slow subscribers?

We are rapidly increasing amount spent on content. This quarter increasing spend y/y over 100%. That y/y increase is declining but is substantial increase all through this year. Always want to get more content, and as we get more content will get more subscribers and then more content. Will continue to add more content for very long time.

6:05 How should we think about subscription costs as a % of revenue?

Will vary by market and maturity. Think about it as contribution margin and contribution profit. Did better in Q4 than expected, so taking up target as 11% for Q1 contribution margin. In international markets, still negative, losses will abate as we grow breaking into positive.

6:06 What’s driving change in tone and practice in terms of exclusivity of content.

More that we bid against other cable networks, i.e. Mad Men, movies, those other bidders are cable networks that demand full exclusivity against us. So we’re essentially pushed into bidding exclusive to succeed. What’s driving it is that we’re in the first league of cable network buying.

6:07 Even with streaming growing, TV seems to drive subscriptions considerably. How does Netflix do this?

Our view is to be complimentary with complete previous seasons, catch-up TV, and authentication TV-everywhere is way to go for networks. We’re comfortable with that because we feel like our segment is broad and big at a low price point. So that’s why we’re bidding on prior seasons, not current seasons.

6:08 How do you measure success of original programming?

HBO spends 1/3 of budget on original. That would be high-water mark. We’re starting much more modestly with originals. Some will be judged by how much it gets viewed, how much it costs, does it attract new subscribers and build Netflix’s rep. Will continue to be modest part of our budget until we learn more y by y.

6:09 Can you talk through rationale of making all episodes of Lilyhammer available at once?

Binge viewing, watching episode after episode. Our origianl content strategy emphasises that brand strength. Not particularly focused on single show for driving retention — all shows.

6:11 Do contracts differentiate you from only web-only or also pay-TV?

It varies, different types of exclusivity in different contracts. Strongest form, Dreamworks, Relativity. Some it’s just exclusive in internet SVOD. There’s quite a mix there.

6:11 Do you feel like you’re in an overbought position re: content?

Feel great about content we’ve got, not about profit stream this quarter. impact of lower # of subscribers not showing up in quality of content, just in profit stream. Hope to mitigate that as we grow subscriber base and international expansion.

6:13 What % of steraming is on TV vs. mobile/smartphones vs. laptops

Don’t discuss publicly

6:13 Why don’t add a la carte for new releases?

I don’t think there’s a lot of brand strength in being everything for everyone. Gain brand strength from being something important and precise. If we were to add pay-per-view it would confuse brand. # of providers who already offer pay-per-view and we have no way to do it better that we know of. Focus on working with partners and keeping clarity of brand. We believe there’s a large enough market at $8 unlimited subscription to help us grow very large. Very large niche that we think we can lead.

6:15 What does content underspending mean in 4Q?

Related to contract dates shifting out a month or so, small number.

6:15 Is there a case to be made for relative profitability long term of US vs. international subscriber.

Relative. In any market in which we have strong scale advantage will have higher profitability and vice versa. Part of why we’re investing early in as many markets as possible.

6:17 How do you determine you have right ingredients at launch?

Research on consumer preferences, in-market research, all informs our intuition. Learn after launch, what people are viewing, what they like, how much is hi-def, what platforms. Considerable variation between markets.

6:18 Latin America, different income levels and broadband penetration. Might it achieve profitability faster or lower than say Canada?

Latin America, you can infer from earnings letter, is growing slower than Canada did in first quarter launch. Building a new brand in Latin America, more of a U.S. halo in Canada and device penetration. Two things are turning out to be important. Good and possibly great market going forward, but slower profitability than Canada. Will take longer than two years, odds are, to reach profitability in Latin America, aspirational benchmark. Two-year goal internally.

6:21 What is Latin American content like? How is it priced?

Pricing’s not an issue, aggressively priced, 99 pesos in Mexico. Most content viewing is Hollywood content, complimented by telenovelas.

6:21 How does piracy in Latin America affect pricing?

If piracy affects, lowers pricing because potential to monetise is lower.

6:22 Why do you dismiss LOVEFiLMS so quickly?

Netflix is easier to use in streaming, LOVEFiLMs is mainly DVD. We have a leg up in streaming experience.

6:22 Four distinct regions. Is there a need to favour one over another?

No, no such need.

6:22 Why did international subs decline quarter-over-quarter?

International freeze — we launched Latin America mid-September, big burst of trials up, no market that we launched in December.

6:23 Do you expect international quarterly losses to begin to decline in Q2?

Yes, will moderate, go down in moderation from Q1 to Q2, dependent on subscriber growth and revenue.

6:23 If DVD business continues to decline, will you consolidate warehouses? How will Post Office closings affect?

Post Office closings have been put off, so no effect. No practical savings to closing centres. Not material, low cost.

6:24 How will consumers react to 56-day release window?

Our DVD subscribers continue to be weighted toward catalogue, not new release.

6:25 Adding video games or 3d movies? Premium for those?

Already have 3d movies, Blu-Ray 3d. No plans for video games.

6:25 Seems guidance is suggesting that DVD subscriber contributes 6x more to profits than streaming. Do you still feel it is wise to push toward streaming?

The analysis is well-intentioned but not looking at marginal cost and marginal increment. Marginal streaming subscriber is almost all contribution margins. Marginal DVD has number of variable costs and DVDs fees. Actually profitability of new streaming subscriber, contribution margin is almost twice DVD subscriber. Would like to have someone use both services but if only going to use one, would prefer streaming.

6:26 Why reduced expectations to Q1 margins?

Related to reduce revenue that we discussed in letter, not going down too much. Q4 to Q1 we usually see seasonal reduction in DVD business.

6:27 will Netflix market DVD subscriptions?

No, will keep it stable but not market DVD subscriptions. Keep it running very well. Have looked at it, but not a great take-rate.

6:28 Matching roll-outs of new markets to profitability. Cycle repeating until near global offering?


6:28 Looking at competition for streaming rights, Hulu and Amazon doesn’t match content of Netflix yet, but do you see their bidding activity picking up?

Very little market just for streaming rights, mostly generalized exploitation rights, and so Hulu Plus and Amazon are very small compared to cable networks that we bid against.

6:29 What are implications of future Apple TV?

No insight on Apple TV, but there is a small 3×3 inch box that Apple invited us on, has been very successful for us, just updated it and added Netflix for Kids, now throughout Latin America, expanded into UK and Ireland, working very well with current Apple TV.

6:30 Why is hours stream a relevant metric?

It’s a measure of engagement and scale in terms of widespread use of our service, will not update on quarterly but on milestone basis.

6:31 Could you update on % of subs that are DVD and streaming?

40% of our total streaming subscribers domestically. Continuing to fall.

6:33 How is Facebook integration impacting sub growth in Latin America and Canada?

No direct measurement on what’s due to social integration. Look at engagement as driving focus, going very well, excited about possibilites of social TV.

6:34 Update on when app will be available?

In investment letter.

6:34 Apple sold 15 million iPads last quarter, but you don’t believe tablets are subscriber acquisition channel. Could they grow?

Not particularly, tablets are very successful and people are watching Netflix on tablets, but not acquistion vehicle, consumption vehicle. Bullish on tablets, investing heavily in it, updated iPad interface, key part of our strategy. We don’t comment on useage across devices but investing in tablets because we see increased viewing relative to TV.

6:35 Smart TV?

Smart TV is one of our fastest-growing device categories. Longterm trend is very exciting and positive.

6:36 In hindsight, do you wish you waited on secondary?

Always fun to pick stock prices in hindsight. Relative dilution is unfortunate, but otherwise in much stronger position.

6:37 call-in questions

6:37 Reed, talked about investing in DVD business with Qwikster but now it seems like you’re not going to put much more emphasis on DVD from investment standpoint. Do you expect standalone DVD subs to be down each quarter through 2012?

Yes, we expect steady decline every quarter forever in DVD. DVD subscriptions regardless of standalone or not will decline steadily essentially forever.

6:39 Last filing expecting EPS loss for year around offering, how have near-term results on outlook for first quarter affected? Share count?

Referred to investor letter. Share count: 55.4 million diluted share count at end of quarter.

6:40 On Warner home entertainment 56-day window, mentioned in letter improves relationship with Warner. Some investors wondering possibility licence more Warner TV content going forward. Is relationship with Warner improved such that it’s more likely you could secure Warner content?

Don’t believe that we said it improved relationship. Perfectly healthy, respectful relationship. When we’re top bidder and make most money, we get content. We don’t do them favours, they don’t do us favours. Trust and respect.

6:42 colour on Q4 underspending?

It was related to the fact that we had to make some estimates on Netflix button payments and estimates were too high.

6:42 Said won’t add new geographies until you return to profitability. Is that quarterly?


6:43 DVD business has possibility of making more per sub w/ with more disks, etc. Any opportunity for that with streaming?

We think $7.99 is right price for streaming. Feel great about that price, no plans to change that. We will be add various kinds of multi-account options over the year. Those are aimed at providing better experience, so that not all of your kids content shows up for you and not all yours shows up on your kids’ account.

6:44 Should be able in the longterm to have a better margin position than HBO, but it depends on our relative scale. Need to be larger in terms of subscriber size. And needs substituion more than compliment.

6:47 Longterm churn?

Not something that we focus on, make it easy for subs to get in and get out, one aspect of membership change is that if we go to your credit card and charge doesn’t go through, you’re instantly canceled for membership purposes. When card clears you become a member again. That makes churn numbers not sensible which is why we’ve been focusing on net additions and subscriber growth, not churn. And retention gets better longer sub stays with us.

6:48 is that similar DVD to streaming on same cohort basis?

Roughly in line.

6:49 On Q1 streaming guidance, mentioned that 200k fewer domestic streaming subs in Q1 potentially on subscriber hold: guidance would be 200k higher if it wasn’t for that change?


6:50 Sense for how you think about mix of marketing and content spend as you’re entering new markets?

Can’t help on that for competitive reasons. Enter big on both. Each market learning more and more, adjusting.

6:52 Q4 11 subs better than guidance. Why, was December better?

We said in letter that Oct. and Nov. matched and Dec. was stronger, combination of holiday growth adds and fewer cancels than expected.