SAN FRANCISCO – Netflix Inc. attracted another 3.6 million customers to its video subscription service in the first quarter, the biggest growth spurt yet in a prosperous run that has established Netflix as a Hollywood power broker and Wall Street darling.
The financial results announced Monday topped analyst forecasts. But management offered a cautious outlook that included a second-quarter earnings projection below analyst estimates. That caused Netflix shares to shed more than five per cent in Monday's extended trading.
Netflix's first quarter earnings nearly doubled to $60.2 million, or $1.11 per share, during the first quarter. That was up from $32.3 million, or 59 cents per share, at the same time last year.
The performance was four cents per share above the average estimate among analysts surveyed by FactSet.
Revenue rose 46 per cent to $719 million about $13 million above analyst estimates.
The company, which is based in Los Gatos, Calif., ended March with 23.6 million subscribers in the U.S. and Canada, up from 20 million at the end of 2010. The first-quarter surge left Netflix with more subscribers than long-established pay-TV channels such as CBS Inc.'s Showtime.
Company officials said they were extremely pleased with progress in Canada, which is their first market outside of the United States. They said Netflix aims to break even within two years of entering an international market but will probably do that in about half the time in Canada.
"In Canada, we've been very successful and we intend to be breaking even on an operating contribution basis within four quarters of launch, which is in Q3," Netflix chief executive Reed Hastings said on a corporate webcast Monday.
"That's probably too high a bar for every international territory but eight quarters feels good."
Netflix charges $8 per month to stream movies and TV shows over high-speed Internet connections. Most customers pay a little more per month so they can also rent DVDS delivered through the mail.
The company is trying to nudge its subscribers to stream video more frequently to help lower its postal expenses. In the process, Netflix hopes to free up more money to buy more compelling material for its streaming library, which is currently stocked with more than 20,000 movies and TV shows.
Netflix spent $192 million on streaming rights in the first quarter, nearly quadrupling the amount spent at the same time last year.
The company's recent success emboldened Netflix to expand its streaming service outside the U.S. After entering Canada last fall, Netflix plans to begin streaming in another international market that management will identify later this year.
Netflix ended March with 22.8 million subscribers in the U.S. The remaining 800,000 are in Canada, where a coalition of companies and groups has asked the federal regulator to examine Netflix's exemption from contributions to a fund for producing Canadian content.
Canada's main Internet service providers, the cable and phone companies, also charge customers extra if monthly data usage rises above a cap placed on their plans – a hurdle that Netflix has overcome by setting their Canadian service at a s slightly lower video quality that requires less bandwidth.
"I'm not sure I would call it a solution," Hastings said.. "I think the right solution, over time, would be if Canadians enjoy uncapped Internet like the rest of the developed world."
However, chief financial officer David Wells said the company has already penetrated eight per cent of Canadian households with broadband Internet service – after only seven months in the online market.
"It took us six years in the U.S. to get there," Wells said. "We think we've got a great business going in Canada and we're excited about going forward."
After adding more than three million subscribers in each of the last two quarters, Netflix expects its growth to taper off in the spring and summer – typically a tougher time to sell subscriptions because more people are taking vacation and spending more time outside.
Netflix thinks it will add 1.3 million to 2.25 million subscribers in the second quarter. The company projected earnings as much as $1.15 per share for the period, below the average analyst estimate of $1.19, according to FactSet.
The company's shares fell $13.17, or 5.2 per cent, to $238.50 in extended trading. After tripling last year, Netflix's stock price had risen more than 40 per cent so far this year before the reaction to management's forecast.
Amazon, Dish, and ... ?
Now that Netflix Inc. has proven there's a growing appetite for streaming movies and TV shows over high-speed Internet connections, more competitors are expected to vie for a piece of the action.
Amazon.com Inc. recently entered the fray by extending free video streaming to online shoppers who pay $79 annually for free and discounting shipping of merchandise. Dish Network Corp. is believed to be the next player to leap into the field after paying $228 million to buy the remnants of fallen video-store chain Blockbuster Inc. The deal struck in a federal bankruptcy auction earlier this month gives Dish the rights to Blockbuster's brand and a streaming service that so far has been charging customers for each video they want to see instead of offering a monthly subscription plan like Netflix does.
During a Monday conference call about Netflix's first-quarter results, Netflix CEO Reed Hastings talked about what Dish might be cooking up.
QUESTION: You mentioned Dish as a competitor. Could you elaborate?
ANSWER: We really don't know what Dish is up to, but presumably they paid a couple hundred million for Blockbuster, not for its technology, but for its brand .... It would be consistent to do that if they had plans to launch a service with a fair amount of content and a fair amount of marketing.