Netflix beats estimates as profits jump

Original programming such as "Orange Is the New Black" and "House of Cards" has helped Netflix report third-quarter profit that beat analysts' estimates and added US customers faster than projected as the video-streaming service passed HBO in paid domestic subscribers. The shares surged. Profit increased fourfold to 52 cents a share, beating the 47-cent average of 27 analysts' estimates. Including free trials, domestic users rose 4.3 percent to 31.1 million from the second quarter, surpassing the 31 million average of eight estimates compiled by Bloomberg. The results suggest Netflix's Web-based service has growth potential beyond that of premium cable-TV networks.

Chief executive officer Reed Hastings is offering a mix of original programs like “Orange Is the New Black” and unlimited viewing of movies and TV shows for $7.99 a month, or €6.99 in Ireland. He has begun talks to bring Netflix to cable-TV systems in the US, after reaching initial deals in Sweden and the UK, and set his sights on at least matching HBO’s global subscriber count.

“The real number we’re looking at is their 114 million, and we’re at 40 million,” Hastings said in an interview. “So we’ve got a ways to go.” Hastings estimates it can reach 60 million to 90 million in the US alone.

Netflix surged as much as 12 per cent to $396.98 in extended trading after the results. The stock rose 6.4 per cent to an all- time high of $354.99 at the close in New York and has risen almost quadrupled this year, for the biggest gain in the Standard and Poor’s 500 Index.

Hastings took note of the gain in his note to investors. “In calendar year 2003 we were the highest performing stock on Nasdaq,” he wrote in a letter to investors. “Some of the euphoria today feels like 2003. We do our best to ignore the volatility in our stock. The progress we’ve made over the last 10 years is stunning. We want to make the next 10 years even more remarkable.”

Netflix expects to double its spending on original content next year, Hastings said, and may raise money to pay for it. ‘’Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of original content,’’ Hastings wrote. He declined to elaborate.

Netflix also said it's changing the accounting for original shows that premiere on its service, which will result in costs being recorded sooner. Third-quarter net income jumped to $31.8 million from $7.68 million, or 13 cents a share, a year earlier. Sales increased 22 per cent to $1.11 billion from $905.1 million a year ago, beating estimates of $1.1 billion. Hastings has hooked viewers with original programs such as ''Orange Is the New Black,'' which began streaming during the quarter, and the Emmy-winning ''House of Cards.'' The company has also reached deals to get exclusive movies from Walt Disney and DreamWorks Animation SKG.

Netflix is becoming ''more comfortable'' with the idea of owning shows in the future, rather than licensing them for set periods, chief content officer Ted Sarandos said in a video interview after the results. Original programs build interest in the service and attract audiences over time, he said. The company is actively looking to produce original movies, he said. While ''Orange Is the New Black'' spurred subscriber growth, a bigger percentage of Netflix viewing is generated by full-season reruns of shows such as ''Breaking Bad,'' ''The Walking Dead'' and ''Pretty Little Liars,'' Hastings wrote.

The company began service in the Netherlands during the quarter, helping bring its international subscriber total to 9.19 million. Netflix projected total worldwide users may reach 43.6 million in the fourth quarter, the midpoint of its forecast, including 10.5 million outside the US

Netflix forecasts fourth-quarter profit will range from $29 million, or 47 cents a share, to as much as $45 million, or 73 cents, with worldwide streaming revenue of as much as $965 million. The company no longer estimates DVD revenue. Analysts project profit of 45 cents a share, the average of 28 estimates, and revenue of $1.15 billion. Next year the company will spend about $500 million to market the service around the world, Hastings said. In the US, paid subscribers totaled 29.9 million, Netflix said. That's an increase from 28.6 million as of June 30, and puts the service ahead of HBO, Time Warner Inc.'s premium cable-TV network, which has about 28.7 million, according to researcher SNL Kagan.

Bloomberg