• Netflix Closes in On 50 Million Subscribers and International Profitability

    Netflix announced strong financial performance for Q1 '14 late yesterday, continuing its momentum from 2013. The company reported a total of 48.35 million global subscribers, including 35.67 million in the U.S. and 12.68 million internationally. That was up a total of 6.25 million subscribers vs. the end of 2013, and just slightly behind the 6.4 million subscribers added in Q4 '13.

    Netflix generated $1.27 billion in revenue in Q1 '14, vs. $1.02 billion in Q1 '13. However, its operating profitability in Q1 '14, at $97.6 million, was more than triple the $31.8 million from last year. Contribution for U.S. streaming was up to $201.2 million in this year's quarter vs. $131.3 million in last year's quarter.

    Importantly, after losing nearly $800 million cumulatively on its international expansion begun in Q3 '10, Netflix cut its international loss in Q4 to $35 million (less than half its rate of last year's quarters) and also said that the existing international footprint would be in a position to achieve profitability this year. However, continued international expansion will push the overall segment into another net loss.

    International has always been a big question mark for me, particularly since Netflix provided little country-by-country detail, but the company's ability to turn the corner in the aggregate is very encouraging.

    To get a sense for how strong Netflix's recent growth has been, just one year ago, at the end of Q1 '13, the company had a total of 36.31 million subscribers and at the end of Q1 '12 it had 26.48 million subscribers. That means in the past year it has added 12.04 million subscribers (up 33.2%) and in the past 2 years, it has added 21.87 million subscribers (up 82.6%).

    As usual, Netflix didn't break out exactly what's contributing to the subscriber growth - new additions, improved retention or both. But CEO Reed Hastings focused on "member satisfaction" in the follow-up earnings call (see embed below), noting that it is increasing and that this contributed to improved retention. As well, original programming is playing a bigger part, with Hastings observing that the company's marketing messages have shifted from an emphasis mainly on price. Chief Content Officer Ted Sarandos also observed that Netflix's English language originals are performing well internationally.

    Beyond the quarter's financial performance, there were 2 noteworthy items: first, that Netflix would increase monthly rates by $1-$2 sometime later in 2014, while grandfathering in existing subscribers' rates for a period of time, and second, that it opposes the Comcast-Time Warner Cable merger on the grounds that it would create too dominant a broadband provider in the U.S.

    Despite this, Hastings went out of his way to praise Comcast's CEO Brian Roberts as being extremely thoughtful, going so far as to say that if there was one person to trust with such extensive Internet control, it would be Roberts. In reply to Netflix's opposition to the TWC merger, Comcast quickly issued a statement, noting it is "based on inaccurate claims and arguments." Given the respective size and influence of Netflix and Comcast, the back-and-forth between the companies and the dynamic between Hastings and Roberts will be closely followed.