Netflix Posts Terrible Results, Bets The Company

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Netflix reported earnings yesterday, and they were not good. The two big ticket items:

  • Netflix lost 800,000 net subscribers in the quarter, more than anticipated, and
  • The company said it would be unprofitable for “a few quarters” starting in Q12012.

The other headline numbers in the quarter vs the street from our live coverage at SAI:

  • 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 subscribers: 23.79 million vs. 24.5 million
  • International subscribers: 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 low subscribers numbers was backlash from consumers related to Netflix’s price increase, and in the earnings call CEO Reed Hastings said he believed that “wave” of lost subscriptions was on the verge of washing over. 

Netflix plans to be unprofitable because it is investing in its international businesses, particularly the UK and Ireland, as subscriber growth is lower than anticipated. 

This is also because Netflix is spending a boatload of money on acquiring new content. Per the earnings letter: “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.” (Emphasis added.)

This means that, at a high level, now more than ever, Netflix is betting the company on streaming. Netflix is embracing its disruption and letting that business die off slowly as a cash cow and betting everything on streaming.

It remains to be seen whether Netflix will be successful, and it doesn’t have a choice, but most businesses disrupting will go through a rough patch and thus it has been the case here. Netflix will keep transitioning its customers over to streaming, as this projection from JP Morgan’s Doug Anmuth indicates:

netflix subscribers

Photo: JP Morgan

Over the longer term, Netflix has to square a circle: pay top money for premium content (and reasonable money for a lot of other content) while spending money to acquire and keep customers to maintain scale, and do it without commoditized. The bullish thesis is that with scale, Netflix can afford to play content owners off of each other and afford to not pay for some content, which should help it keep costs down and the company profitable. It’s a big bet, but it’s one the company has to make. 

This note was published as part of BI Research, a new industry intelligence service from Business Insider. The service is currently in beta and is free. To learn more and sign up, please click here.

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