Netflix's 4Q restores company's investment luster

Associated Press
FILE-In this Jan. 24, 2007 file photo, Netflix customer Carleen Ho holds up DVD movies, "Talladega Nights" and "Pirates of the Caribbean' that she rented from Netflix, at her home in Palo Alto, Calif. Netflix said Wednesday, Jan. 23, 2013, that its Internet video service added 2 million U.S. subscribers during the final three months of the year to produce an unexpected profit for the company. Here's a breakdown of Netflix Inc.'s subscribers as of Dec. 31 and details on its forecast (AP Photo/Paul Sakuma, file)
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SAN FRANCISCO (AP) — Netflix has re-emerged as a stock-market star after a fourth-quarter performance that demonstrated its success in broadening the appeal of its Internet video service despite stiffer competition.

The results announced Wednesday served as a resounding endorsement of Netflix Inc. CEO Reed Hastings, who has been spending heavily to license more compelling movies and TV shows in hopes of warding off intensifying competitive threats. Companies such as Amazon.com Inc. and Coinstar Inc.'s Redbox have expanded into streaming video to Internet-connected devices to compete with Netflix.

Hastings' strategy has been met with widespread skepticism, but it paid off during the final three months of last year.

Netflix gained 2 million video-streaming subscribers in the U.S. during the quarter, propelling the company to a profit during a period that was supposed to produce a loss. In a letter to investors, Hastings credited the gains to people's interest in watching a wide range of entertainment on the tablet computers and Internet-connected TVs that they got as holiday gifts.

"As the sales of tablets go, apparently so go the fortunes of Netflix," Wedbush Securities analyst Michael Pachter said.

Investors were euphoric. Netflix's volatile stock soared $36.24, or more than 35 percent, to $139.50 in extended trading after the numbers came out. If the rally carries over into Thursday's regular trading, Netflix's stock would hit a new 52-week high. It would also mark a nearly 80 percent increase since the company's early December announcement of a licensing deal with The Walt Disney Co. for exclusive streaming rights to new movies beginning in 2016.

The upturn in Netflix's stock has been a boon for billionaire investor Carl Icahn, who began accumulating a 10 percent stake in the company in early September when the stock was trading below $55.

Despite the recent rebound, Netflix's stock remains well below its peak price of nearly $305 reached in July 2011. That was around the same time the company outraged subscribers with a change that increased prices by as much as 60 percent for those who wanted to stream video and still rent DVDs through the mail. Hastings has been scrambling to make amends since the backlash triggered mass cancellations.

"There is still an echo and a bruise," Hastings told analyst during a Wednesday conference call. "We are still extremely thoughtful and careful about what we are trying to do. It wouldn't take much for the issue to flare up again or for us to lose trust. You might say we are on probation at this point, so we are out of jail."

The fourth-quarter surge in new customers left Netflix with 27.1 million U.S. subscribers to its streaming service, which costs $8 per month. Hastings said he believes the U.S. streaming service eventually will have 60 million to 90 million subscribers, although he hasn't set a timetable for reaching that goal.

"We have a long way to go, but we are very happy with the quarter," Hastings said in a Wednesday interview.

Netflix's international expansion also picked up steam as the company ended the quarter with an additional 1.8 million subscribers outside the U.S.

That gave Netflix 33.3 million video-streaming subscribers worldwide as Netflix began the new year, up by nearly 10 million from the start of 2012.

Netflix also still has 8.2 million customers signed up for the DVD-by-mail rental plans that launched the company's early success. Although Netflix is phasing out the disc service, the company hung on to more of the DVD subscribers than it anticipated during the fourth quarter. Netflix lost 382,000 DVD subscribers during the quarter.

Netflix seems confident it will build upon its recent momentum in the current quarter, which will be highlighted by the Feb. 1 debut of a much-anticipated TV series called "House of Cards." The series is produced exclusively for the video streaming service and stars Academy Award-winning actor Kevin Spacey.

In his letter, Hastings described "House of Cards" ''as a defining moment in the development of Internet TV." Netflix is releasing all 13 episodes of the first season simultaneously on the hunch that the added convenience will foster more subscriber loyalty instead of encouraging people to sign up for the service for just a month or two to watch exclusive series such as "House of Cards."

The company, which is based in Los Gatos, Calif., forecast that its video streaming service will pick up 1.35 million to 2.1 million in the U.S. during the first three months of this year.

Netflix also expects to break even or generate another profit during the quarter. Analysts previously thought the company would lose money to start the year as expenses for the international expansion and video-licensing fees outpace revenue growth.

Although he applauded Netflix's fourth-quarter performance, Pachter still believes Netflix's rising bills to license video will hobble the company.

"I think the company is genuinely mistaken in how it thinks it is going to manage content costs," Pachter said. "This is truly a house of cards and it's going to come crashing down this year."

As of Dec. 31, Netflix owed $5.6 billion in licensing fees during the next five years, up from $5 billion through Sept. 30. In an indication that he believes Netflix can shoulder the financial load, Hastings told analysts Wednesday that he is interested in licensing Sony Corp.'s' latest movies in a deal similar to the one recently struck with Disney. Sony currently has a licensing agreement with the Starz pay-TV channel that ends in 2015.

Netflix earned nearly $8 million, or 13 cents per share, in the fourth quarter. That was a 78 percent plunge from net income of $35.2 million, or 64 cents per share, at the same time last year.

Taking their cue from Netflix's own projections in October, analysts polled by FactSet had predicted the company's would lose 12 cents per share, also because of expenses for expansion and licensing.

Revenue climbed 8 percent from the previous year to $945 million, about $10 million above expectations.

For the full year, earned $17 million, or 29 cents per share, on revenue of $3.6 billion. Netflix had started the year warning it might sustain an annual loss for the first time in a decade. The company earned $226 million, or $4.16 per share, on revenue of $3.2 billion in 2011.

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