Netflix shares surge as subscriber number beats forecast

Netflix shares surged 18.21% today to a new all time high of $US562.05 today – giving the California-based company a market cap of $US29.45 billion.

The leap followed yesterday's March quarter earnings report.

CMC Markets analyst Colin Cieszynski tells NBR investors took cheer at a 4.88 million bump in total subscriber numbers to 62.3 million (59.62 million of whom are paying; 40.32 million of the paying subs are in the US). Netflix had forecast a 4.1 million rise in subscribers.

Netflix growth appears to be leveling off in the US, where it is predicting only 650,000 new subscribers (versus the year-ago quarter's 2.25 million gain). Overseas, Netflix – which launched in NZ and Australia late March – forecasts it will gain 1.9 million overseas.

Revenue was $US1.47 billion, versus the year-ago quarter's $US1.06 billion.

And net profit for the three months was $US24 million, a dip on the year-ago quarter's $53 million.

The company would have made a loss if not for the oldest part of its business. "Our DVD-by-mail business in the US continues to delight more than 5.5 million members and provided $85 million in contribution profit in the first quarter," Netflix's letter to shareholder notes.

Netflix increased the number of original series it commissioned, increasing its costs. Its bottom line was also hurt by the higher US dollar, which lowered offershore earnings as earnings from offshore operations were repatriated, Mr Cieszynski says.

Netflix itself partly pinned the lower profit on the cost of expanding to new markets. The ANZ launch is set to be followed by a push into Japan and other countries. The company says its international division's losfes will increase to $101 million in the current quarter.

Mr Cieszynski says Netflix shares have been stuck in a trading range between $US410-490.

When he talked to NBR, ahead of today's trading, he was looking to see if the stock could finally bust through the $US500 mark. It did, and then some.

The CMC analyst, picking up on Netflix comments, says a share split is likely. While it doesn't change the actual total value of the shares, a split has a positive psychological effect on retail investors, he says.

First commentary on ANZ
Netflix is now in 50 countries. In its March report, the company says the addressable market in New Zealand and Australia is eight million broadband households.

The company said in its results commentary, "In ANZ, Netflix benefited from high consumer awareness, a fervent fan base for original series like House of Cards and Orange Is The New Black and operator relationships with Optus and iiNet, the second and third largest broadband providers." In New Zealand, Netflix is partnering on promotion with Vodafone, our second largest provider (although the carrier is also offering deals for Sky TV's Netflix clone Neon).

That comment could cut two ways. Some Kiwis and Aussies became fans of Netflix shows by using software to access Netflix US. Netflix shows have also been shown in New Zealand through multiple avenues. The company says as contracts expire, it will now make all its original shows exclusive to its local service. The first major instance of this switch is season three of Orange is the New Black, which will be Netflix NZ only. Seasons one and two screened on TVNZ and were available on demand through Lightbox, Neon and Quickflix.

Netflix NZ launched with about one eighth the content of Netflix US. The company says it will add content to Netflix NZ as local rights to content come up for grabs.

New threats
The section of its shareholder letter on competitive threats brushes off the recently launched HBO NOW (a $US14/month service that cuts out both old-school middlemen like pay-TV providers and new-school ones like Netflix to reach consumers directly over the internet, or at least via Apple). It reiterates Netflix' argument that HBO NOW is more complement than replacement.

"We view 'Internet MVPD' offerings like the rumored Apple offering, Sony’s Playstation Vue and Dish’s Sling TV as more competitive against the current pay TV bundle than to Netflix which is lower cost, has exclusive and original content, and is not focused on live television," the Netflix letter says.

 MVPD, a term recently coined by the FCC in the US, stands for “multichannel video programming distributor” or a service that merges traditional broadcast and internet programming. Sky TV is heading in this direction with its $120 million upgrade programme that will give its decoders the ability to screen Sky GO and Neon-style on-demand content delivered by broadband.

In terms of new streaming threats from the likes of Apple and Sony, Mr Mr Cieszynski says, "It's not like the traditional TV market where established players are fighting over a 1% gain in audience." New services are bringing tens of millions more viewers to streaming video on-demand each year. "There's a lot of room to grow," he says, and room for multiple players to have a larger slice of the expanding pie.

Easier to geoblock?
On a technical level, the shareholder letter says, "Over the next year we’ll evolve from using HTTP to using Secure HTTP (HTTPS) while browsing and viewing content on our service. This helps protect member privacy, particularly when the network is insecure, such as public wifi, and it helps protect members from eavesdropping by their ISP or employer, who may want to record our members’ viewing for other reasons."

Some geeks say this will make it easier for Netflix to implement geo-blocking (preventing, say, someone in New Zealand from accessing its larger Netflix US service). However, Netflix' official stance remains that it's impossible to stop VPNs and other tools used to beat geographic restrictions. 

During a New Zealand visit before the local launch, one Netflix US exec described the geoblocking controversy as "temporary shit."

Laws would be updated to deal with technology, he said. And Netflix itself would seek global or near-global deals once it had enough international customers.

ckeall@nbr.co.nz

Follow @ChrisKeall