Hacking NetFlix

Netflix Stock Gains 42% on Better Than Expected Earnings

Investors appear to be happy with Netflix's earnings and subscriber numbers yesterday, and the stock jumped 42% overnight, closing at 146.86. 

Disclosure: I do not own shares in Netflix.

via Inside Bay Area.

Netflix Hits 33 Global Million Streaming Customers & $945 Million in Revenue in Q4

Netflix ended Q4 with more than 33 million global subscribers (27 million domestic & 6 million international), and had a modest profit of $7.9 million on $945 million in revenue. 

Netflix Q4 results highlights include:

• Netflix added 2 million domestic and 1.8 million international streaming customers.
• Netflix lost only $105 million on the International business, less than expected because of higher than expected growth of international subscriptions and revenue.
• Netflix lost only 380,000 DVD subscribers in Q4, less than anticipated.
• Domestic streaming's contribution to profit is expected to surpass DVD in Q1.
• The letter notes that they have had "constructive conversations" with Carl Icahn, who owns 10% of Netflix.

Q1 2013 Forecast:

• 28.5 to 29.2 domestic streaming and 6.6 to 7.3 million international streaming customers.
• Domestic streaming profit of $122 - $130 million, and international streaming loss of $94 - $80 million.
• Net income of $0 to $14 million.

From the Q&A call at 3pm PST:

• Price Increase? Netflix CEO Reed Hastings: "We're happy at $7.99 and won't comment on the future."
• Streaming commitments: $5.6 billion, $2.5 billion on the books, $3.1 not.
• Regarding "Qwikster" fiasco: Hastings said that they are still on "probation."
• Profiles: Still testing new profiles feature, will launch sometime in 2013.
• House of Cards impact on subscriber additions: "Small benefit for Q1."

Netflix compared the top 200 shows on Netflix to content available on Amazon Prime and Hulu, and shared the results:

"More narrowly, Amazon Prime, Redbox Instant, and Hulu also offer low-cost streaming offerings, and they have some of the same content that Netflix has, as well as some unique content.   The more unique content they have (for example, “Battleground” and “Community” on Hulu, or “Falling Skies” and “The Closer” on Amazon Prime), the more they are a different service than ours.  To the degree they have some of the same content as Netflix, they are potentially a substitute for Netflix.  To examine this, we looked at the top 200 titles on Netflix:  our 100 most popular movies and our 100 most popular TV shows in Q4.  Of these 200, 113 are not on Amazon Prime, Hulu Plus or Redbox Instant. Of the 87 that are available on at least one of these services, Hulu Plus offers 27 of the 200; Amazon Prime 73 of the 200; and Redbox Instant 12 of the 200, with significant overlap in TV between Hulu Plus and Amazon Prime, and in movies between Amazon Prime and Redbox Instant.  In other words, when it comes to the most popular content with members on Netflix, none of these services are good substitutes to Netflix."

You can read Netflix's letter to shareholders on the Netflix Investor Relations website.

Carl Icahn Exercises Options, Owns 9.98% of Netflix

Home Media Magazine reports that Carl Icahn now owns 9.98% of Netflix, just under the 10% that would trigger the new poison pill response.

Activist investor Carl Icahn has exercised his remaining stock options, solidifying a 9.98% stake in Netflix.

New York-based Icahn paid $154.7 million for more than 4.2 million shares, which when coupled with the 1.3 million shares purchased Oct. 31, bring the investor’s total stake to more than 5.5 million shares for $323.6 million. That's $58.4 per share, according to a Nov. 19 regulatory filing.

I never thought Netflix would have Icahn as a part-owner.

So What Has Happened Now that Carl Icahn Owns Almost 10% of Netflix?

It figured Carl Icahn would pick the week of a hurricane and then a nor'easter to purchase 10% of Netflix, because it's caused a storm at Netflix HQ. 

First the news breaks that Carl Icahn has purchased 9.98% of Netflix, and the stock jumps. Home Media Magazine reported that a Netflix spokesperson issues a somewhat friendly statement, “We have many shareholders, now including Mr. Icahn, and we’re always open to their perspective on how to build on our success.” Very friendly, given how Icahn behaved once he had a stake in Blockbuster.

So Netflix adopted a poison pill provision earlier this week:

The Rights Plan is intended to protect Netflix and its stockholders from efforts to obtain control of Netflix that the Board of Directors determines are not in the best interests of Netflix and its stockholders, and to enable all stockholders to realize the long-term value of their investment in Netflix. The Rights Plan is not intended to interfere with any merger, tender or exchange offer or other business combination approved by the Board of Directors.

Pursuant to the Plan, Netflix is issuing one Right for each current share of common stock outstanding at the close of business on November 2, 2012. Initially, these rights will not be exercisable and will trade with the shares of Netflix’s common stock. If the Rights become exercisable, each Right will entitle stockholders to buy one one-thousandth of a share of a new series of participating preferred stock at an exercise price of $350 per Right.

Greg Sandoval at CNet interviewed former Blockbuster CEO John Antioco about working with Icahn, and he had this advice for Hastings:

If Reed Hastings were on the call with us now, what advice would you give him about dealing with Carl Icahn?
Antioco: Do the best you can of not letting him get to you. Keep your wits about you and keep your sense of humor because Carl has one too. I think Reed is a smart guy who is not prone to emotional swings. If he can keep his head about him and deal with Carl in a strategic manner and not let Carl's style control him, he'll be okay.

On Thursday evening Icahn said he was considering a hostile takeover, among other options:

Asked by TV network CNBC whether he would "go hostile" on Netflix, Icahn said: "The thought had certainly entered my mind. I have to admit I think about it, but we haven't made that decision."

While Icahn said a hostile takeover was "certainly an alternative," he downplayed the possibility several times. He added that he would not be able to pay as much for Netflix as a "synergistic buyer" looking to acquire an Internet movie and TV subscription service.

It'll be interesting to see how much Carl Icahn interferes with or helps Netflix, or if his interest in the company helps spur a purchase (and a quick return on his money). No matter what happens, things just got a lot more interesting at Netflix.

Thanks to Mike, Seth, Fabian, Matthew, Tom, and everyone else that wrote in about this story.

Notes from the Neflix Q&A: No Plans to Increase Streaming Price; Focus on Recommendations & Content

Netflix CEO Reed Hastings and CFO David Wells answered investor questions during the quarterly investor Q&A:

• Hastings said that they expected it will still take three years to fully recover from the Qwikster event last year.
• The Olympics did impact subscriber growth in Q3.
• About one third of DVD shipments were new releases, and the majority were catalog titles.
• Tablets are used more for streaming than phones, but TV is where most customers are using streaming.
• Hastings isn't worried about people joining just to watch House of Cards or other shows and quitting. 
• Netflix's main focus is on recommendation and showing people the right 15 or so box shots for titles the customer wants to watch. 
• Netflix will continue to experiment with gesture, voice and other user interfaces.
• Hastings said they were happy with the decision to use Amazon Web Services.
• Original programming will increase content spend by 10% to 20%, but it is an upfront cost. 
• When asked about increasing prices to increase revenue per user, Hastings said that they were "very excited about the $7.99 price point" and see reason to change it. 
• Netflix is seeing engagement with both exclusive and non-exclusive content, but exclusive content costs more and there is more viewing of non-exclusive content.
• Hastings noted that there a number of exclusive options and degrees of exclusives for content.
• Personal stream plans are in the works, and there will be some testing this quarter but no release date has been set.
• Hastings resigned from the Microsoft board because he's on 6 different boards.
• Hastings said that Netflix was using tablets and phones as second screens to help select content instead of displaying information about the directors, etc. 
• Hulu is the closest competitor in the US because of the focus on TV shows and ownership by some of the biggest content providers.
• Netflix will have more Netflix buttons on more smart TV's this season.

Netflix Added 2 Million Subs in Q3 2012 and Ended Quarter with $905 Million in Revenue

Netflix released Q3 2012 results and ended Q3 with more than 29 million subscribers and $905 million in revenue. Highlights from the financials:

Netflix ended Q3 with 25.1 million domestic subscribers (23.8 paid), and 4.31 internatioal subscribers (3.69 paid). DVD subscribers declined to 8.61 million (8.47 paid).

Global revenue was $905 million, with domestic streaming bringing in $556 million, international at $78 million, and VD at $271 million. Netflix ended the quarter with a modest $8 million in profit (13 cents per share). 

For Q4 Netflix is forecasting 26.4 to 27.1 million domestic and 5.2 to 5.9 million internations streaming customers (paid and trial subs), and possible a loss of $13 million to a possible profit of $2 million in income. DVD subs will continue to decline to 7.85 to 8.15 million subs, but will contribute $117 to $129 million in profit, offsetting international losses of $119 to 107 million. 

In a letter to shareholders Netflix cites two metrics to gauge increased customer satisfaction: "We increased our per member viewing in Q3 by more than 30% (year over year) to record highs by improving our content and member experience; and our voluntary churn is generally the lowest it has ever been.1 In contrast, involuntary churn has been increasing as we grow more mainstream and attract more lower-income households."

TV is huge for Netflix, and they note that 6 of the top 10 TV shows are exclusive to Netflix, and the rate is slightly higher for the top 50. 

Netflix published a chart to show that streaming obligations have stabilized:

Netflix is competing in the recently launched Nordic countries directly with HBO, and it'll be a battle everyone will be watching closely, as Hastings believes that HBO will eventually unbundle HBO GO in the USA and compete directly with Netflix.

Interesting stats from Q3: Netflix streamed 3 billion hours of movies and TV shows and there are now more than 800 Netflix-ready devices. 

Netflix to Announce Q3 2012 Results on October 23rd

Netflix announced that they will release Q3 2012 financial results on October 23rd at 1:05pm PST, followed by a Q&A session at 3pm PST. Anyone can listen in at http://ir.netflix.com. 

The calls are always interesting and sometimes include surprises. Do you think that Netflix will meet or beat expectations?

Amazon Signs Streaming Deal with Epix as Netflix Exclusive Ends

NewTeevee reports that Amazon has signed a deal with Epix now that Netflix's exclusive streaming deal with Epix has ended.

EPIX, which includes a premium TV channel and video-on-demand service, is a joint venture from Paramount Pictures, Metro-Goldwyn-Mayer Pictures, and Lionsgate. The agreement includes “new releases such as The Avengers, Iron Man 2, The Hunger Games, Transformers: Dark of the Moon, Thor and Rango as well as popular favorites such as Kick Ass, Paranormal Activity 2, True Grit, The Lincoln Lawyer, and Justin Bieber Never Say Never. EPIX also brings original programming including comedy specials and concerts such as Kevin Smith: Burn in Hell and Usher: Live from London.”

Netflix stock took a hit when the news broke, as the news eliminated any doubt that Amazon is a serious streaming competitor for Netflix. I'm still wondering if Amazon will ever break out Prime Instant Video as a monthly subscription instead of a perk for $79 per year Amazon Prime Customers.

Upcoming Netflix Investor Events

Netflix announced two upcoming investor events:

Bank of America Merrill Lynch 2012 Media, Communications & Entertainment Conference
Thursday, September 13, 2012
Beverly Hills, CA
3:15 p.m. Pacific Time / 6:15 p.m. Eastern Time
Presenter: Ted Sarandos, Chief Content Officer 

Goldman Sachs 21st Annual Communacopia Conference
Wednesday, September 19, 2012
New York, NY
5:50 a.m. Pacific Time / 8:50 a.m. Eastern Time
Presenter: David Wells, CFO

The events are usually interesting and anyone can listen in at http://ir.netflix.com.  

Netflix Returns to Profitability in Q2 2012 with 25.7 Million Global Streaming Customers

Netflix announced that they have returned to profitability in Q2, expect to remain profitable in Q3, but will show a loss in Q4 as they enter another international market.

The Q2 2012 numbers:

Domestic streaming subscribers (paid): 22.69 million
International streaming subscribers (paid): 3.02 million
DVD customers (paid): 9.96 million
Global revenue: $889 million
Global net income: $6 million 

On the streaming war in Europe:

6 months ago, we launched Netflix in the UK and Ireland, and today we are one million members strong. We believe we have pulled ahead of LOVEFiLM in every important streaming-related metric. Going forward, competing effectively with Sky is our core and substantial challenge. 

On recovering from the price increase last year:

Our reputation with our members and their likelihood to recommend the Netflix service is steadily improving. Our original thesis was three years to full brand recovery (subsequent to the DVD-related price increases last summer), and that seems correct so far. 

Regarding the domestic competition:

We have yet to see HuluPlus or Amazon Prime Instant Video gain meaningful traction relative to our viewing hours, but as we continue to build a domestic profit stream they are likely to increase their efforts to gain viewing share. Redbox Instant by Verizon, once they launch, will face a big challenge to break into the top 3 of subscription streaming services.