Netflix posts first net loss since 2005
Netflix Inc. reported its first net loss since 2005 during the first quarter and raised investors’ concerns about its future subscriber growth, sending its shares tumbling in after-hours trading.
The Los Gatos, Calif., video subscription company reported a net loss of $5 million on revenue of $870 million in the first three months of 2012, compared with a profit of $68 million on $789 million in revenue during the same period last year.
Netflix’s losses were caused by its rapidly expanding international operation, which sucked $103 million out of the company’s bottom line.
The quarterly loss and the company’s overall results were in line with analysts’ estimates and Netflix’s own guidance. But shares plunged more than 15% in after-hours trading. One of the primary reasons appears to be investors’ pessimism, based on the data presented Monday, that Netflix will meet its goal of adding 7 million customers to its streaming service in the U.S. this year.
Multiple questions during a call with investors were about subscriber growth or retention. Chief Executive Reed Hastings returned to the topic repeatedly, including in his closing comments, when he argued that the subscriber growth figures appeared more unstable than they actually were.
“I know it’s got some people concerned, but we feel great about our progress and being on track for our 7 million net [additions] for the year,” he said.
The company added 1.74 million net subscribers to its streaming service in the U.S. during the first quarter but lost 1.1 million net DVD subscribers. Overseas, it added 1.2 million net subscribers.
In total, Netflix had about 26.5 million customers in the U.S. and 3.1 million in other countries as of March 31.
Netflix expects its Canadian operation to turn a profit this spring, a year and a half after launch and sooner than expected. But Hastings and Chief Financial Officer David Wells said in a letter to investors that Latin America, Britain and Ireland will take longer than two years.
Latin America has been particularly problematic, as Netflix has been facing problems with awareness, device penetration, Internet infrastructure and online consumer payments in the region.
“The odds of us building a large, profitable business in Latin America are very good, but it will take longer than we initially thought,” Hastings and Wells wrote.
This year, Netflix will launch an additional European country, the duo wrote in the letter. Although they declined to disclose which country it would be, people familiar with the matter but not authorized to speak publicly have previously said Netflix was acquiring the rights for content to stream in Spain.
Netflix’s U.S. streaming business generated $67 million in profit on $507 million in revenue. Its DVD business produced $146 million in profit on $320 million in revenue. The fact that DVDs are more profitable but losing subscribers to the less profitable streaming business has concerned some investors. But Hastings and Wells said they expect streaming video’s profit margin to continue growing.
Despite rumors, however, Hastings said on the call that Netflix had no interest in selling its DVD business.
Hastings said that Netflix’s first exclusive series, the Norwegian import “Lilyhammer,” was “quite successful based on the amount we invested.” The company has a growing slate of original content in the works, including the return of “Arrested Development” and the Kevin Spacey political drama “House of Cards,” which Hastings said is a “natural outcome of our becoming a cable network like any other.”
Meanwhile, Netflix viewers are increasingly choosing television over movies on the company’s streaming service, a trend accelerated by the recent loss of new releases from Sony Pictures and Walt Disney Studios via a deal with pay cable channel Starz that expired in February.
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