By Rip Empson
Netflix (NASDAQ:NFLX) released its second quarter 2012 earnings report, in which the video rental veteran outpaced estimates, improving on last quarter and meeting most expectations and even beating some. Revenue increased to $889 million compared to the same period for 2011. Earnings per share came in at $0.11 per share. In the weeks leading up to the release, analysts had projected Netflix to remain steady, reporting a profit of $0.04 per share on sales of $889 million.
That works out to a $6 million gain for the quarter, and brass are happy with the outcome over the quarter. In their letter to investors (see below), CEO Reed Hastings and CFO David Wells said that Netflix returned to global profitability this quarter, and is gearing up for more of the same in Q3. Although, as it should be, expectations remained mild for the rest of the summer.
Hastings said in the earnings release:
Q3 has begun strongly for us, and we expect to be profitable again in Q3. In Q4, we will launch our next international market, which will drive us temporarily back into the red. We have enormous challenges ahead, and no doubt will have further ups and downs as we pioneer Internet television. We are making progress in every market we serve, and see a once-in-a-generation opportunity ahead to build the world’s most popular TV show and movie service.
In terms of subscriptions, the company also reported moderate gains, but didn’t meet the benchmark set last quarter, when they saw “nearly 3 million” new subscribers for their streaming business. In total, both international and domestic, Netflix’s subscriptions increased by about 1.09 million, while DVD subscriptions fell by approximately 850K. All in all, this quarter bumps Netflix’s streaming numbers up, but only slightly. Last quarter, the company had 23.41 million subscribers, compared to Q2, which rose modestly to 24 million domestic streaming members.
About 10 months ago, Netflix launched in Latin America, and the company reported Tuesday that it recently surpassed one million members. In turn, it launched in the U.K. and Ireland 6 months ago, and hit one million members there as well, with Netflix quick to point out that it has “pulled ahead” of its European competitor LOVEFiLM in “every important streaming-related metric.”
This international growth is important to Netflix and its long-term growth. Already Netflix has said that its international segment represents 13 percent of its total streaming members — and represented just over half of streaming adds in the quarter. While the company forecasts continuing growth in Q3, it will launch in yet another international market in Q4 and downplayed expectations as a result, saying that it was likely to end up “in the red.”
Moreover, in terms of outlook, Netflix is using 2010 for its year-over-year forecasts, because 2011 was “an anomaly” due to its mid-year price change. (That’s putting it mildly.) So, the company expects its net additions to be about the same as 2010 Q1 and Q3, while Q4 stands to be higher, in spite of the spend from launching in another international market. While Netflix saw 50% fewer domestic net additions compared to Q2 2010, it expects the Olympics to have a negative or cannibalizing effect on viewership and thus puts guidance between 1M and 1.8M domestic net adds.
In terms of competition? Netflix has said repeatedly over the last few years that it really hasn’t seen enough overlap from Amazon Prime and HuluPlus to get it shaking in its proverbial boots. However, Ryan today covered the unveiling of Redbox and Verizon’s streaming video content service, which could pose a more serious threat to Netflix down the road just based on the reach of Verizon’s network.
The details were scant in the announcement of Red-rizon’s new service today, so naturally Netflix deflected, saying it “will face a big challenge to break into the top three of subscription streaming services.” Which, to be fair, is obviously true. For now.
Another thing to note: Netflix was demure in its earnings statement, and we may learn more in its investor call, but the company went out of its way to praise HBO Go, which one might find surprising since the two compete (as Netflix admits) for content and viewers.
However, Netflix said that it might also “find opportunities to work together,” hinting at a possibile collaboration. Because HBO requires one to have a cable subscription to use HBO go, many cord cutters refuse to pay the high price. Collaborating with Netflix could be big for both companies, and more importantly, the end user.
Lastly, the company also officially announced that it has appointed Kelly Bennett as its new CMO. Bennett joins Netflix from Warner Brothers, where she was a VP of Marketing. This is interesting when put in the context of Netflix’s ongoing management shuffle, as portrayed in an epic piece by Greg Sandoval that investigates the reasons for Netflix’s unprecedented fall from grace in 2011.
Q2 2012 letter to investors below: