Can Netflix executives do anything to rekindle Wall Street’s affection? It appears not, or at least not yet: Netflix was one of the media business’ few losers on Monday with shares falling 4.8% to $111.62. The decline stood out on a day when the benchmark S&P 500 was up 3.4%, and U.S. media stocks were up more than 4%. Traders soured quickly on Netflix after rewarding it with a 7% pop at the opening bell. They liked the fact that Netflix abandoned its plan to split its DVD rental business into a separate operation called Qwikster. But the flip-flop seemed to reinforce concerns that CEO Reed Hastings has lost his sense of direction. Netflix has lost nearly 63% of its value since mid-July when it announced that consumers would have to pay 60% more to continue receiving its service that offered DVD rentals as well as video streaming.
Something always seems to be a little weird when Netflix announces big news about itself — and today’s unveiling of its streaming deal with DreamWorks Animation is no exception. The news appeared to have been handed to The New York Times; it had the first story as well as interviews with executives from both companies. But that’s not the problem: What’s curious is why The Times felt confident enough to say that unnamed “analysts estimate (the deal) is worth $30 million per picture to DreamWorks.” Although there were no details to support that estimate, it quickly became perceived as a fact. For example, a Reuters story stated that the deal is “worth $30 million per picture to DreamWorks over a number of years.” If that’s true, then it’s a big deal; HBO currently pays the studio about $20M per picture. If the $30M figure for the Netflix deal is accurate, then Caris & Co analyst David Miller says his 2013 earnings estimate for DreamWorks “would therefore improve from $1.58 (per share) to $1.70.”
OK, so is it true? The companies don’t say: Many hours after the Times story ran, Netflix and DreamWorks jointly filed a press release that said “financial terms of the agreement were not disclosed.” But some analysts find the $30M figure hard to believe. Susquehana Financial Group’s Vasily Karasyov writes this morning that “we would be surprised if the terms for (DreamWorks Animation) are more favorable than those of their current deal with HBO. We think the change in pay TV partners was due to HBO shifting away from animation and not because (Netflix) offered significantly superior terms.” Janney Capital Markets’ Tony Wible also says that “it appears (DreamWorks) was kicked out of HBO and that (Netflix) was the buyer of last resort.”
Netflix CEO Reed Hastings had better hope that consumers are more forgiving than Wall Street. The company’s shares fell 7.4% on Monday following Hastings’ mea culpa for botching the roll out of Netflix’s decision in July to separate its streaming business from DVD rentals — he tried to gloss over the fact that it would raise prices by 60% for half of his customers, who want both. He also disclosed today that DVDs will be handled by a new stand-alone unit called Qwikster that will begin to rent games for XBox 360, PlayStation 3, and Wii consoles. Netflix’ closing price of $143.75 is about half of what it was just before the July announcement, and down $64.96 from last Wednesday before the company said that its subscriber numbers for 3Q would be lower than it had forecast.
Savvy company watchers say they believe Hastings is scrambling to fix Netflix’ image because its board or large investors — or perhaps both — are becoming panicked. They have a lot riding on the belief that Netflix will remain the Internet’s leading alternative to cable TV and soar as broadband video becomes ubiquitous. Even after the recent drop in value, Netflix stock trades for an extraordinary 21 times expected earnings — nearly twice the multiple for most media companies. That means most of its value comes from investors’ faith that Netflix will become far more profitable than it is now.
But Hastings’ PR blunder …
Netflix Shares -9.6% In After-Market Trading Following Earnings Report; CEO Won’t Comment On DreamWorks Animation Talks
UPDATE, 3:25 PM: This is weird. It isn’t just that CEO Reed Hastings wouldn’t comment on the big story of the day — his talks to secure an exclusive streaming deal for DreamWorks Animation’s films. Netflix requires analysts to email their questions, so there was no opportunity for someone to ask a follow-up. Hastings simply says that “we’re always in talks with all of the different providers.” Ugh. As for the price change, Hastings says that although “we feel bad about having customers upset with us,” the company anticipated the widespread anger and still feels “great about the decision.” Netflix wasn’t looking specifically to raise consumer prices, he says. The company wanted to separate the U.S.-based DVD rental business from its global streaming-only business — the main focus now. “The pricing change was an outcome of that.” He says it will generate more revenue for the company by year’s end.
PREVIOUS, 1:27 PM: Looks like Netflix won’t escape unscathed from the 60% price hike for its combined DVD rental and online streaming service. CEO Reed Hastings says in a letter to shareholders that in Q3 “we will see only the negative impact of the pricing change,” with domestic subscriber net additions lower than in the same period last year. Also, revenues “will only grow slightly on a sequential basis.” Still, Hastings defends the price change saying that Q4 could be “our first billion-dollar revenue quarter, driven by strong U.S. performance.” Netflix says that in Q2 it generated $68M in net income, up 54.5% vs the same period last year, on revenues of $789M, up 51.7%. The profit figure, at $1.26 a share, solidly beat the $1.11 consensus among analysts who follow the company. But the revenue figure was light. Analysts expected nearly $792M.
If you thought that Facebook might be gearing up to compete with Netflix, then think again. Netflix CEO Reed Hastings just joined Facebook’s board of directors. “Facebook is propelling a fundamental change in how people connect with each other and share all kinds of content,” Hastings says. He added that he wants to help Facebook “take advantage of all the opportunities ahead.” The Facebook board also includes CEO Mark Zuckerberg, investors Marc Andreessen, Jim Breyer, and Peter Thiel as well as the Washington Post’s Donald Graham. Hastings also sits on Microsoft’s board.
Netflix last week was the object of envy and fear. The firm that’s evolving from DVD-by-mail provider to Web video subscription service showed in latest quarterly earnings that it’s growing at an astonishing rate. By charging as little as $7.99 a month, Netflix signed up 3.6 million new subscribers in the first three months of 2011, giving it a total of 23.6 million. That’s a 69% increase in just one year and puts Netflix ahead of Comcast and Sirius XM. Still, media executives don’t know what to make of the company. Is it friend or foe? Is it just another customer for studio-produced movies and TV shows looking to complement existing broadcast and pay TV providers? Or is Netflix poised to become a competitor to existing channels –- and even a formidable new gatekeeper for Internet entertainment?
The most realistic fear is that Netflix will amass enough subscribers so it can dictate prices to studios that want to transmit their entertainment over the Web to PCs, smartphones, and tablet computers — as well as living room TV sets. If Netflix keeps its subscription price low, then it also may devalue all entertainment: A $4 charge for a VOD movie would look out of whack when you can watch an entire month of interesting shows for just twice that amount. But some industry forecasters say Netflix could do far more damage to existing business models if it drives a consumer stampede away from pay TV. …
UPDATE: Netflix Still In Deal-Making Mode; Beats Street Expectations for 1st-Q But Stock Price Dips In After-Market Trading
UPDATE: Netflix CEO Reed Hastings in today’s earnings call says the company’s much-ballyhooed deal to license the original TV series House of Cards is merely a test — and a relatively modest one at that. “I don’t know if it’s anything we’d bet the farm on, but we’re willing to try it with a little bit of our budget,” he told Wall Street analysts. He said in a letter to shareholders that Netflix might make “two or three similar, but smaller, deals” to see whether “we can efficiently build a big audience for a well-produced serialized show.” He said, in his note, that the characterization of Netflix as “rerun TV” is “fundamentally correct.”
Hastings told analysts, though, that he was intrigued by the performance of Starz’ Spartacus, which was also available on Netflix. It “opened our eyes” to the possibility that a show might develop a bigger buzz, and more TV viewers, when it runs on the Web as well as conventional TV. Meanwhile, Hastings says that Netflix is “working hard” to offer its streamed content to Android-powered smartphones and tablet computers. “It’s a big priority for us.” As for the competition in Web-delivered video, Hastings says he’s as eager as anyone to see what his rivals have planned. “We really don’t know what Dish (Network) is up to” with its acquisition of Blockbuster,” he adds. “A big market attracts a lot of competition.”
PREVIOUS, 1:30 PM: Netflix continues to strengthen the sense of inevitability that it will become a must-have service for Web users who want to watch professionally produced entertainment. It said Monday that it ended the first quarter with a net profit of $60 million, up 88% vs. the same period last year, on revenues of $719 million, up 46%. That comes to $1.11 in earnings per share. In January the company told investors that revenue could go as high as $717 million while earnings would come in between 90 cents and $1.13 a share. Even though Netflix often beats its own guidance, analysts considered that ambitious: The consensus was $703.6 million and $1.08.
Most underestimated Netflix’s appeal to the fast-growing number of people watching movies and TV shows via broadband. It had 23.6 million global subscribers at the end of March, a gain of 3.6 million so far in 2011 and close to the 23.7 million at the top of the target range it set for itself in January. That makes Netflix the largest subscription entertainment service, surpassing Comcast’s 22.8 million subscribers and Sirius XM’s 20.2 million. Some 22.8 million of Netflix’s customers are in the U.S. Now the company says it expects to have as many as 25.9 global million subscribers at the end of June. It projects second quarter revenues of as much as $798 million, and earnings per share as high as $1.15.