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Netflix Rises Most Ever After Posting Surprising Profit

By Cliff Edwards
January 24, 2013 4:36 PM EST 4 Comments
Netflix Inc. Chairman and Chief Executive Officer Reed Hastings
Netflix Inc. Chairman and Chief Executive Officer Reed Hastings

Netflix Inc. (NFLX), the world’s largest online-video service, rose the most ever after beating its forecast for fourth-quarter subscriber growth and posting an unexpected profit.

The stock jumped 42 percent to $146.86 at the close in New York, its biggest gain since it went public in May 2002. Netflix said yesterday it signed 2.05 million new U.S. Internet subscribers in the quarter, bringing total domestic online customers to 27.2 million. The gain led to a net income of 13 cents a share, while analysts predicted a loss.

Chairman and Chief Executive Officer Reed Hastings, who signed Walt Disney Co. (DIS) to an exclusive U.S. streaming deal for films starting in 2016, is defying skeptics who questioned the company’s ability to build an online TV network that competes with Time Warner Inc. (TWX)’s HBO and other pay services. Hastings is expanding overseas, while continuing to purchase film and TV rights and facing new competitors at home.

“Netflix is successfully balancing the costs of international expansion against the increasing profitability of its domestic business,” said Paul Sweeney, a Bloomberg Industries analyst.

The stock has more than doubled from about $58 a share, where it was trading last September when billionaire Carl Icahn accumulated almost 10 percent of the stock, including options, for $168.9 million, according to filings. The value of his 5.54 million shares has risen by more than $490 million, including today’s jump. The shares are still down about 50 percent from their record high of July 2011.

‘Every Share’

“We still own every share we bought and we believe it’s still got tremendous potential,” Icahn, 76, said yesterday in an interview.

In his quarterly message to investors, Hastings said Netflix has had constructive conversations with Icahn about creating a more valuable company, without elaborating.

Netflix posted fourth-quarter net income of $7.9 million, compared with profit of $35.2 million, or 64 cents, a year ago. Analysts had forecast a loss of 13 cents, the average of 28 estimates compiled by Bloomberg. Revenue rose 8 percent to $945.2 million, beating the $934.5 million average of estimates.

In October, Netflix said it could add as many as 2 million domestic online customers. The company finished the year with 8.22 million in the U.S. who get DVDs by mail and 33.3 million streaming subscribers worldwide.

Those included more than 6 million international online customers, a gain of 1.8 million from three months earlier. The increase helped Netflix keep its overseas loss to $105 million, less than the $113 million midpoint of its forecast.

International Outlook

International losses will narrow to $87 million in the current first quarter and shrink further this year, the company said.

This quarter, Netflix forecasts revenue of $1 billion to $1.03 billion, compared with analysts’ projections of $969.2 million. Results may range from break even to a profit of $14 million, or as much as 23 cents a share. Analysts estimate a loss of 7 cents. The company expects to add 1.3 million to 2 million domestic streaming customers.

Despite some calls by investors, Netflix has no immediate plans to raise its $7.99 monthly subscription fee, Hastings said on a conference call. The company could take advantage of low interest rates to raise a substantial amount of capital to pay for additional exclusive content, he said.

Original Shows

Hastings is investing in original programs to fend off competition from services including one from Amazon.com Inc., TV Everywhere options such as Time Warner’s HBO Go and a new service called Redbox Instant by Verizon, a joint venture of Verizon Communications Inc. (VZ) and Coinstar Inc. (CSTR)’s Redbox unit.

“House of Cards,” a political series featuring Kevin Spacey and Robin Wright, makes its debut on Feb. 1.

“We’re more and more interested in exclusive content,” Hastings said. “We’ll grow into original programming step by step.”

Disney’s December deal to offer its full film slate including Marvel and Pixar movies on Netflix led some analysts to reexamine their views on the company’s prospects. On Jan. 18, Tony Wible, of Janney Montgomery Scott LLC in Philadelphia, recommended Netflix for the first time in six years.

Of 37 analysts who follow Netflix, six recommend the stock, 21 rate it hold and 10 say sell.

Netflix accounts for about a third of prime-time Web streaming, according to Sandvine Inc., a Waterloo, Ontario-based network services and research company. More than half of consumers ages 18 to 24 years old who have a TV connected to the Internet watch Netflix, according to research from NPD Group, a Port Washington, New York-based market tracker.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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