Sunday, April 22, 2012

(BN) Netflix Counting On U.S. Growth as Overseas Eats Profits: Tech

Bloomberg News, sent from my iPhone.

Netflix Counting On U.S. Growth as Overseas Eats Profits

April 23 (Bloomberg) -- Netflix Inc., the world's largest video-subscription service, reports first-quarter results today that will tell investors whether the company can sustain a rebound in customers.

Netflix, which posts earnings on its website after markets close, is expected to report 23.4 million U.S. online subscribers, the average of nine analysts' estimates compiled by Bloomberg and a gain of 1.73 million from December. Analysts project a net loss of 27 cents a share on sales that rose 21 percent to $866 million from a year earlier.

The outlook for second-quarter growth in U.S. subscriptions may be the most important number of the day. Netflix needs to keep adding domestic viewers to keep rivals at bay and counter expansion costs overseas.

"Netflix is potentially being impacted by the law of large numbers and rising competition," said Aaron Kessler, a San Francisco-based analyst with Raymond James & Associates.

The Los Gatos, California-based company forecasts losses this year in Latin America and the U.K., and will spend more than $3 billion on TV shows and movies in the next three years. With competition from Inc., the largest Web retailer, and media groups including Time Warner Inc.'s HBO and Hulu LLC, some analysts say U.S. online subscribers may peak.

Kessler, who recommends investors sell the stock, said online subscribers may stall at about 26.8 million this year as competing services cannibalize the U.S. market in the second half of 2012. Seven analysts recommend buying Netflix, while 20 say hold and nine have sell ratings.

U.S. Potential

"They're the leading player in an industry with strong secular tailwinds, and can grow to 35 million domestic subscribers," said Justin White, an analyst at T. Rowe Price Group Inc., the largest holder, with 4.97 million shares as of Dec. 31, according to data compiled by Bloomberg. "Their content costs aren't going to rise terribly until 2014-2016, when they begin competing with HBO and Starz for content that comes up for renewal on those services."

Chief Executive Officer Reed Hastings has said Netflix has the potential to reach 90 million U.S. streaming subscribers. Since 2009, 31 million customers have quit the service, Kessler estimated in a Feb. 27 note, indicating the company already may have reached more than half the market.

Steve Swasey, a company spokesman, said Netflix won't discuss subscriber numbers or its outlook before the results.

Investors will look at today's second-quarter forecast for changes in the company's momentum. Analysts surveyed by Bloomberg project Netflix will sign 781,000 new customers to its $7.99 monthly streaming plan.

January Effect

In January, optimism over the fourth quarter, when Netflix stemmed midyear customer losses and added 220,000 online users, drove a 73 percent rebound in the stock. It has retreated about 18 percent from the 2012 high of $129.25 on Feb. 6.

Netflix fell 0.9 percent to $106.11 on April 20 in New York and has gained 53 percent this year. The stock peaked at a closing high of $298.73 in July 2011, just as a price increase and aborted bid to split off the DVD mail-order business led some customers to cancel the service and triggered a selloff.

Tony Wible, a Janney Montgomery Scott LLC analyst who has mostly recommended selling the stock, lists reasons for pessimism. Traffic growth at the Netflix website is slowing, while Coinstar Inc., operator of Redbox DVD kiosks, posted quarterly results that may suggest it's gaining share.

Netflix also recently bought the site, suggesting it may revive plans to split off the mail-order disc operation, Wible wrote in an April 19 note.

Loss Forecast

In January, the company forecast a first-quarter loss of 16 cents to 49 cents a share, on sales of $842 million to $877 million. Domestic streaming customers will range from 22.8 million to 23.6 million, suggesting growth of 1.13 million to 1.93 million viewers.

Analysts predict quarterly net losses through the third quarter and a return to profit in the final three months.

Hastings says Netflix will benefit as more customers sign up for online viewing instead of mail-order plans. The shift saves postage and handling charges, and has little incremental cost per customer, he said. Profit margins in the streaming business, measured as sales minus content costs, may widen to 11 percent in the first quarter, the company said on Jan. 25.

The mail-order DVD business, which ended the year at 11.2 million customers, probably shrank to 9.8 million through March, analysts said, and will lose 623,000 more this quarter.

Future Costs

Hastings's strategy of expanding the streaming business faces challenges from Hollywood studios that are seeking higher fees when contracts come up for renewal, Anthony DiClemente, a Barclays Capital Inc. analyst in New York, wrote in an April 3 note. He has an equal weight, or hold, rating on the stock.

Netflix's total future program commitments, costs extending out five years or more, rose to $3.9 billion at the end of 2011 from $1.3 billion a year ago, according to Philadelphia-based Janney Montgomery Scott. Current costs amount to half of projected 2012 sales of $3.64 billion.

If those continue to rise, the company may be forced to raise prices and accelerate marketing and advertising to acquire new customers, said Michael Pachter, a Wedbush Securities analyst in Los Angeles with an "underperform" or sell rating. First-quarter growth probably wouldn't have been as robust without heavy advertising and marketing, he said.

"The key question is whether they are necessarily going to need additional content to attract subscribers," Justin Colatosti, an analyst at Dawson James Securities in Boca Raton, Florida, said in an interview. "Spending more to attract customers, what does that do ultimately to long-term margins?"

To contact the reporter on this story: Cliff Edwards in San Francisco at

To contact the editor responsible for this story: Anthony Palazzo at

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