7 Things We Learned From Netflix's Quarterly Report

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NetFlixNetflix (NFLX) investors are seeing red after Monday night's quarterly report.

The video service giant posted reasonable financial results for the first quarter, but the stock took a big hit on weaker-than-expected revenue guidance for the current quarter. Netflix sees its streaming and DVD businesses combine for $873 million to $895 million in revenue.

The pros were perched at $897 million.

The concerns for Netflix's model are certainly valid, but let's dive deeper into some of the news out of Netflix on Monday night.

1. Streaming Is Booming

Netflix is no longer providing monthly churn or quarterly gross additions, but it's offering up net subscriber data. Netflix saw its streaming subscriber count add nearly 3 million net subscribers, which means it has almost 3 million more new customers than cancellations for its streaming service.

Domestic streaming subscribers grew by 1.74 million to hit 23.41 million members. In its strongest international quarter since expanding outside of the United States, Netflix added 1.21 million international customers to close at 3.07 million international subscribers as of the end of last month. It added more net international accounts during the past three months than it did during the three previous quarters combined.

2. DVD Rentals Are Kabooming

It's no longer a surprise to see Netflix's disc-based subscribers shrink. When asked about its DVD business three months ago, CEO Reed Hastings told analysts to expect the number of members on disc-based rental plans to continue shrinking forever.

Netflix lost more than a million net DVD accounts during the period. It now has a little more than 10 million DVD-based subscribers, and 7 million of those also pay $7.99 a month more for streaming.

Disc rentals themselves aren't dead. Netflix may be shrinking and Blockbuster may be closing down stores, but Redbox parent Coinstar (CSTR) is posting healthy growth for its unmanned disc-spewing kiosks. However, Netflix isn't interested in actively pushing its DVD platform. It sees streaming as the future, and rightfully so.

3. Revenue Took a Step Back Sequentially

Revenue climbed 21% to $870 million over the past year, but it's not pretty when you compare last quarter's report to the $876 million in revenue it rang up during last year's fourth quarter.

Sequential weakness may seem to be an odd sight. If Netflix added nearly 3 million streaming accounts and shed just a little more than a million DVD customers, shouldn't revenue be inching higher quarter-over-quarter?

Well, the exact timing of when customers came and went, the fact that customers on streaming plans pay less than viewers on multi-disc plans, the migration of customers on DVD plans downgrading to cheaper plans, and the promotional nature of new accounts on trial deals all factored into the rare sequential slip.

Thankfully even the low end of Netflix's historically conservative guidance calls for revenue to climb during the current quarter.



4. Netflix Claims That It's Not Seeing Starz

One of Netflix's biggest deals for first-run content was a licensing deal that was not renewed by Starz when it expired in February.

The Starz deal was important, largely because it included many of Disney's (DIS) newer video releases. Toy Story 3, Tangled, and Tron were just a few of the movies that went off the streaming service two months ago.

Investors have speculated that Netflix would take a subscriber hit after the Starz deal ran out, but Netflix claims to be holding up just fine.

"There was no discernible change in churn or viewing levels," reads Hastings' letter to shareholders last night. Netflix argues that viewing per member is at a record level, driven largely by the growing number of prior seasons of TV shows that folks are consuming in great quantity.

5. Netflix Isn't in a Rush to Return Money to Its Shareholders

For the second quarter in a row, Netflix avoided buying back stock.

Netflix had repurchased shares in five of the six previous quarters, a move that was criticized after the fact when the company was using its ample cash balance to buy its shares as they raced toward $300 last summer.

Investors shouldn't expect aggressive buybacks or the initiation of a dividend policy anytime soon. Netflix is pouring its money -- and it did manage to generate slightly positive free cash flow during the first quarter -- back into digital content.

6. Netflix Should Return to Profitability This Quarter

After posting a narrower-than-expected loss this past quarter, Netflix may be back in black as soon as the current quarter.
Netflix's guidance calls for a wide range, between a deficit of 10 cents a share and a profit of 14 cents a share, during the second quarter. At the midpoint of its outlook, that would be a small yet welcome profit after Netflix's first quarterly loss in years.

7. Netflix Is Back to Face the World

Netflix's domestic streaming business is profitable and its original disc-based model is even more profitable. The only reason that Netflix posted a loss during the first quarter is that it lost more overseas than it profited closer to home.

Netflix promised a few months ago that it would cease international expansion until it got its financial house back in order. Well, now that we're seeing things moving in that direction, Netflix is ready to introduce its service deeper into Europe later this year.

The market may not be entirely pleased with Netflix's report, but the company isn't turning back now.

Longtime Motley Fool contributor Rick Munarriz does own shares in Netflix and Disney. The Motley Fool owns shares of Disney. Motley Fool newsletter services have recommended buying shares of Netflix and Disney.



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10 Comments

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Jeff

I rarely use the streaming service, so I swallowed a bit hard and took the price increase to keep the disc delivery service along with streaming when the model changed last year -- MOSTLY because since I went HD I prefer to watch as much as I can in HD, and most new movies are now released on Blu-Ray (and a lot of older movies have been re-released on Blu-Ray, as well).

The Blu-Ray adds even an extra buck or two to the cost (or at least it did before, and I'm assuming that's still the case). But it's worth it to me, since I get a chance to watch movies in HD, and also in most cases see the extras (a very few are "rental" releases that don't contain the extras, but studios are shooting themselves in the foot doing that, because I, at least, use these rentals as an evaluation for which movies I might actually want to BUY when the prices drop after a few months in release).

When I got the Blu-Ray of "Bridesmaids," it had ALL the "extras" on it, but they were ALL disabled (you could click to them, but when you clicked to engage them a BLOCK came up saying they were disabled because it was a RENTAL disc). This made me so angry I'll NEVER buy that Blu-Ray (didn't think the movie was all that funny, anyway).

Also, with overnight mail where I live, I can get two movies a week. But if the postal service follows through with supposed plans to shut down a lot of processing centers and possibly END most overnight mail, I might drop the disc part of my service at some point. But for now, I'm still getting a pretty good experience with the disc service.

One other thing, in response to calderasf's comment. IF your computer has a decent video card with an HDMI output, like mine does, you can get an HDMI splitter for about $50 (powered unit, keeps the signal from losing integrity). Mine sends one HDMI feed to my 24" HD computer monitor, the other to my 55" 1080P Samsung LED/LCD TV. When I want to watch ANYTHING as a feed from the computer -- whether it's a Netflix stream, or something I've downloaded from the internet, I simply change my HDMI input on the TV and voila, there it is! I can actually have it up on both monitors at once, but I usually turn off the computer monitor once I do that. Splitters ARE hard to find, but I got mine through Amazon.com (I think). Either them or Newegg. Just do a search for HDMI splitter.
Jeff Hayes

April 24 2012 at 10:54 PM Report abuse rate up rate down Reply
calderasf

I don't own a 50" plasma to watch shows on my computer.

April 24 2012 at 6:26 PM Report abuse rate up rate down Reply
1 reply to calderasf's comment
stalb427

Umm ya i use my computer to watch shows on my 46" tv via an hdmi cord...

So i think you lack a logical progression of how to use the technology to your benefit. Also a Roku box is a great blue ray for those dropping cable and cutting the monthly bills.

I havent had cable for 4 yrs and dont miss it a bit and still get to watch my shows. Right now i pay $8/ month for netflix, $30/ month for internet, and $80/ one time for roku. Ill take, netflix, roku, and net content over a $100 plus cable bill.

April 24 2012 at 8:53 PM Report abuse rate up rate down Reply
Mike

Netflix's streaming is a waste of money. They hardly ever add A-list movies and TV shows will be on season 7 yet Netflix will only have up to season 3 and in some cases will make certain episodes only available for disc renters. They add content seemingly once every 4-6 months. If Blockbuster didnt require you to be a Dish Network customer they'd probably overtake Netflix in no time. All in all Netflix streaming service is at best 2 out of 5 stars, and thats generous.

April 24 2012 at 5:36 PM Report abuse rate up rate down Reply
1 reply to Mike's comment
stalb427

Expand your horizons, ive found a lot of movies and shows on netflix that i had never heard of and maybe didnt have the top notch special effects many expect but they were entertaining none the less.

Besides $8/ month for netflix as compared to $60/ for cable the cheapest plan in my area even. I say netflix wins, havent had cable in over 4 yrs and probably never will again. Cutting that cord was liberating.

April 24 2012 at 9:05 PM Report abuse rate up rate down Reply
Bill Perman

I'm just waiting for the day Netflix adds more A-List titles to streaming. I can understand the hesitation studios have about New Releases, but what about older movies? The Alien Movies, Rambo's, Star Wars, Wizard of Oz, the Godfather Trilogy, Goodfellas, etc. I'd even prefer the Canonball Run and Police Academy over some of their "Just Added" titles.

April 24 2012 at 1:39 PM Report abuse rate up rate down Reply
johnanzalone6

hey NETFLIX get a clue NO ONE wants dvd by mail they want it NOW, NO RIGHT NOW, WAIT THEY WANT IT RIGHT ******* NOW SHEEEEEEEEEEEEEEEEEEEEEESH

April 24 2012 at 1:00 PM Report abuse rate up rate down Reply
2 replies to johnanzalone6's comment
carelctr284

I think 10 million NF customers would disagree with you. The dvd by mail is the only area that has made them a profit, 149 million this past quarter to be exact.

April 24 2012 at 5:37 PM Report abuse rate up rate down Reply
1 reply to carelctr284's comment
stalb427

Netflix is struggling to get quality contracts due to the cable companies actively undermining them as the cable companies are well entrenched competition. However as we who enjoy how netflix is trying to revolutionize how we get our tv continue to support them the streaming will show way more promise in the future...

http://stopthecap.com/2012/03/08/netflix-cost-of-providing-1gb-of-data-is-less-than-one-cent-and-falling/

April 24 2012 at 9:01 PM Report abuse rate up rate down
calderasf

Wow you will be so disappointed in life might as well shoot yourself now Mr. MEMEMEME

April 24 2012 at 6:27 PM Report abuse rate up rate down Reply