Netflix: Recession winner!
As anticipated, the movie rental service blew Q4 out of the water, finishing 2008 with 9.4 million subscribers — up 26% year-over-year. Revenue was $359.6 million, beating consensus. EPS of $0.38 beat the Street by 4 cents. Shares jumped 6.5% in after-hours trading.
Netflix’s (NFLX) subscriber and revenue guidance is strong, too. The company expects to finish Q1 with 10.1-10.3 million subscribers, posting sales of $387-393 million, above consensus. It also expects to finish 2009 with 10.6-11.3 million subscribers, posting sales of $1.58-1.635 billion, above consensus.
On the company’s earnings call — see notes below — CEO Reed Hastings says “millions” of subscribers are watching Netflix’s Internet movie streaming service, and that the company will continue to pour a lot of investment into the service this year. Also coming up: More consumer electronics partnerships so people can watch Netflix streams on their TVs without a computer.
Notable: Netflix’s subscriber acquisition cost dropped 23% year-over-year to $26.67 per gross subscriber. Part of that, no doubt, reflects the company’s huge subscriber growth. But it’s possible it also reflects a cheaper Internet advertising market, where Netflix gets many of its subscribers. We look forward to hearing Netflix’s thoughts on their conference call.
We’re also eager to hear how subscribers have been using Netflix’s Internet streaming service, which has gotten considerably more convenient thanks to a growing content library and more gadget partners that let you watch free movies directly on your TV set.
- Q4 revenue: $359.6 million vs. $354 million consensus, $351-357 million guidance
- Q4 EPS: $0.38 vs. $0.34 consensus, $0.30-0.38 guidance
- Q4 total subs: 9.4 million vs. 9.15-9.2 million (Citi), 8.85-9.15 million guidance
- Q1 revenue guidance: $387-393 million vs. $371 million consensus
- Q1 EPS guidance: $0.25-0.33 vs. $0.30 consensus
- Q1 total sub guidance: 10.1-10.3 million vs. 9.6-9.75 million (Citi)
- FY revenue guidance: $1.58-1.635 billion vs. $1.54 billion consensus
- FY EPS guidance: $1.43-1.59 vs. $1.49 consensus
- FY total sub guidance: 10.6-11.3 million vs. 10.25-10.5 million (Citi)
LIVE Conference Call Notes:
4:57 Uplifting classical music, perhaps from a Netflix classic or foreign film.
4:58 Is this Shenandoah?
5:00 Call begins.
5:00 Cautionary language!
5:01 Conducting Q&A via email, as Netflix has done for the last several quarters. This seems to work pretty well.
5:02 Reed: Our goal is to grow subscribers and earnings every year while expanding into Internet video. Despite recession, grew subs to 9.4 million in Q4. We expect strong growth to continue in Q1. Strong EPS growth, too.
5:02 Strength let us grow EPS while investing in Internet delivered video. Underforecast subscriber growth because underestimated multifunction CE devices from Samsung, Tivo, Microsoft, etc. Better than expected responses to marketing.
5:03 Precise impact of recession unclear, but streaming is energizing growth.
5:03 Expect DVD and Blu-ray shipments to grow in 2009 like they did in 2008 despite flatness in overall DVD rental.
5:04 About 700,000 were renting Blu-ray at the end of Q4, and adoption is growing nicely. Wide adoption becomes increasingly likely, extended life of disc-based viewing, as players get cheaper.
5:05 Will test weekend shipping in parts of the country.
5:05 Plan to substantially invest in streaming content in 2009 as we did in Q4. Plan is to include Starz Play in premium plans. Most of streaming content spending is directly with TV networks and studios. Over 12,000 movie and TV choices, plan to spend as much money as we can licensing as much content as we can. Already one of the studios’ largest Internet spending sources.
5:07 “Millions” of subscribers streaming. Think they’ll watch fewer DVDs over time. Increased streaming content helps with current subs, CE partnerships.
5:08 LG and Samsung Blu-ray players had a high connect rate. Xbox and Tivo had lower % but higher absolute numbers. Don’t pay or charge anything to have software in devices, but do pay CE partners to help create demand for new subscribers. Included in SAC.
5:09 Nearly all of those CE partner subs also rent DVDs, too. Can retain preferred placement over time. New and deeper partnerships. At CES, Samsung and LG announced expansion of Netflix. And to have NFLX app included directly in some LG TVs.
5:09 In discussions with every major CE company, hope to broadly cover Internet TV and Blu-ray category. Currently have exclusive deal with Microsoft Xbox. Added support for Apple computers.
5:10 Roku would be updated to include Amazon. Fully in support of this.
5:11 Ad-supported, PPV stuff also helps grow demand for streaming. Someday, other will offer subscription-based content. But we also have DVD rentals. Our intent is to focus exclusively on subscription model, more likely to prevail this way.
5:12 No firm or model owns an entertainment customer. We think lots of room for us to succeed while others succeed too. Still in investment mode for internet delivery, but we can see how between CE partnerships, possibly reduced disc usage, can keep increasing investment while growing earnings.
5:14 Expect to hit 10 million subs this quarter.
5:14 CFO Barry McCarthy joins. Will comment on results, guidance.
5:19 Full year guidance assumes continued economic climate. Second half of the year hazier because of economy and unknown results of Internet streaming. Full year could be much better or somewhat worse. Given rapid growth of streaming content, we expect popularity of $8.99 plan to continue to grow.
5:23 Anticipate up to $175 million buyback for 2009.
5:24 Trajectory of watch instantly content? Title count? Trying not to get measured by that. But investing faster than revenue growth. Want to have more relevant content for subs, making good progress to date.
5:28 Will you ever offer a streaming-only service? Maybe, nothing holding us back, but given content availability situation, see no need for it yet.
5:30 Key tech hurdles preventing broader adoption of hurdles? Just having people get used to it, watch on PC; Internet devices; content providers following ABC CBS etc.; ecosystem is building very nicely. Internet video on a significant rise.
5:31 Not going to tell us how many Roku etc. subs are new subs.
5:33 Tend to be heavy online advertisers in Q1 when able to get attractive pricing. Expect that trend to be present in Q1 this year.
5:33 No, people not trading down to cheaper plans. More people trading up.
5:35 Broader range of CE partners over the year. Not always number of partners, but number of devices sold. I think our efforts are focused in the right place.
5:37 Haven’t released specific numbers on how many devices. Strategy is working: Getting into devices, manifesting itself positively in P&L.
5:38 A few final questions.
5:39 Hearing that non-premium CPM rates down so much; where’s the beef? I put the question to our CMO in almost exactly the same tone. We already buy at low rates, trickle down must have not hit the remnant space, which is already discounted.
5:42 Going to grow digital very fast in upcoming year.
5:43 May not have a whole lot of visibility into the second half of the year.
5:45 No really strong way to tell if recession helped or hurt the business.
Netflix has already told us that its Q4 was “remarkably strong.” So when the company reports Q4 earnings this afternoon, investors will be paying much more attention to Netflix’s Q1 and 2009 guidance.
What would a good Q1 look like? Somewhere between $371-375 million in revenue and 9.6-9.75 million total subscribers, representing growth around 15-18%, according to Citi analyst Mark Mahaney.
We’ll also be listening for any comments Netflix can share about the progress of its digital streaming service and the health of the online ad market, where Netflix is a big buyer. Please join us today at 4.
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