) surged 35.4% ($36.54) in after-hours trading after the
streaming service provider reported better-than-expected fourth
quarter 2012 results. Earnings per share ("EPS") of 13 cents were
significantly ahead of the Zacks Consensus Estimate of a loss of
12 cents per share.
Total revenue increased 7.9% year over year to $945.2 million
and beat the Zacks Consensus Estimate of $935.0 million.
Moreover, the company reported sequential revenue growth of 4.4%.
Robust subscriber additions in Netflix's streaming business (both
domestic and international) led to the better-than-expected
Notably, Netflix's paid streaming subscriber base (both
domestic and international) increased 8.76 million from the
year-ago quarter and 2.87 million in the previous quarter to
At the end of the fourth quarter, revenue from Netflix's
domestic streaming business increased 23.8% from the year-ago
quarter to $589.5 million. Sequentially, the segment revenue
increased 6%. Netflix's domestic streaming customer base
increased 2.05 million on a sequential basis and 5.4 million from
the year-ago quarter to 27.1 million.
Revenue from international streaming business was up a
staggering 250% year over year and 30.5% sequentially to $101.4
million. Subscriber base also increased to 6.1 million from 1.9
million in the year-ago quarter and 4.3 million in the previous
However, Netflix's domestic DVD business was a disappointment
as it continued its slide in the fourth quarter as well. At the
end of the quarter, revenue from the segment was down 31.3% year
over year and 6.2% sequentially to $254.4 million. Total
subscriber base slumped to 8.2 million. Despite the decrease, the
company reported a slowdown in the rate of subscriber loss.
During the quarter, Netflix lost 0.38 million DVD subscribers,
which was down from 2.76 million subscribers it lost in the
year-ago quarter and 0.63 million in the previous quarter.
Operating profit for the quarter was $19.6 million, down from
an operating profit of $61.9 million in the year-ago quarter.
However, sequentially, operating profit improved 21.7%. Operating
margin declined from 7.1% in the year-ago quarter to 2.1%, due to
Expenses were up 13.8% year over year, primarily due to higher
cost of revenue (20.9% year over year), marketing expenses (2.7%
year over year) and technology and development expenses
Net income for the quarter was $7.9 million compared with
$35.2 million earned in the year-ago quarter. Decline in
contribution profits in the DVD business and higher loss from the
international business dragged the net income from the year-ago
quarter. On a sequential basis, net income increased 2.6% driven
by higher contribution profit from the domestic streaming
Though the reported EPS of 13 cents remained flat on a
sequential basis it was well below the year-ago quarter EPS of 64
cents. The year-over-year decline in the earnings per share was
due to higher costs and margin contractions.
Exiting fourth quarter 2012, Netflix had $748.1 million in
cash and cash equivalents (including short-term investments)
compared with $798.4 million in the previous quarter. Long-term
debt remained at $200.0 million at the end of fourth quarter
Cash used in operating activities was $16.2 million in the
fourth quarter of 2012, while Netflix reported a negative free
cash flow of $51.0 million for the quarter.
For the forthcoming quarter, management forecasts EPS to be
between break-even to 23 cents. Net income is expected to be in
the range of break-even to $14.0 million.
Domestic and International streaming revenue is expected to be
in the range of $633.0 million-$641.0 million and $132.0
million-$144.0 million, respectively. Domestic DVD revenue is
expected to be in the range of $239.0 million to $246.0 million
for the first quarter of 2013.
Management expects total subscribers in the domestic streaming
market and in the international streaming market to be in the
band of 28.5 million to 29.2 million and 6.6 million to 7.3
million, respectively. The U.S. DVD subscriber base is expected
to be in the range of 7.6 million to 8.05 million.
Netflix reported a better-than-expected quarter on the back of
higher subscription additions. Although Netflix's subscriber base
increased considerably in the reported quarter, margins continued
to remain under pressure due to higher expenses. We believe that
Netflix's effective cost management will dictate the company's
Moreover, new streaming content additions [recent deal with
) and original program portfolio] will help the company to
counteract stiff competition from other service providers such as
), HBO and
). However, the company's continuous subscriber loss in its DVD
business and mounting losses from international business are
major concerns going forward.
Currently Netflix has a Zacks Rank #3 (Hold).
AMAZON.COM INC (AMZN): Free Stock Analysis
DISNEY WALT (DIS): Free Stock Analysis Report
NETFLIX INC (NFLX): Free Stock Analysis
VERIZON COMM (VZ): Free Stock Analysis Report
To read this article on Zacks.com click here.