CEO Reed Hastings says the original series “met all of (our) expectations” in becoming “a great success”, although he offered no concrete data to analysts today at the Morgan Stanley Technology, Media and Telecommunications Conference. House Of Cards, the political drama from Media Rights Capital, should be seen as “confirmation of the thesis that we can build something really important.” Its full value in leading people to subscribe to Netflix will become evident when the next season is available. “In the beginning you’re developing a foundation,” Hastings says. Still, he urged investors not to focus too much on House Of Cards‘ performance. “It’s our most viewed content today, but it’s not the center of the company. It may be the center of the PR for a while. That’s OK.” While he doesn’t want people to “think of us as the original content company,” Hastings made it clear that originals will be key to its growth. He talked up Hemlock Grove, a horror show that Netflix will offer in April. “It’s completely different” than House Of Cards, he says. “For many people in this audience, you’ll be grossed out. We’re going to push the boundaries.”
“There’s still an echo and a bruise” from summer 2011 when Netflix infuriated customers by splitting the streaming and DVD rental operations — dramatically raising the price for those who wanted to continue to receive both services — CEO Reed Hastings told analysts this evening. The strong subscription numbers from the last three months of 2012 show that “we’re out of jail” in consumers’ eyes. He adds, though that “we still have a year and a half of probation.” That may be one reason he didn’t want to touch a question about whether Netflix might raise its price — something that would please investors. “We’re happy at $7.99 [a month] and not speculating about the future,” Hastings says. He’s upbeat about general trends, though. For example consumers’ growing interest in tablets and Internet-connected TVs is “very helpful to us.”
Shares are up more than 30% in after-market trading following the company’s report of a Q4 profit — in contrast to the Street’s expectation for a loss. Netflix reported net income of $7.9M, down 77.6% vs the period last year, on revenues of $945.2M, +8%. Analysts expected revenues to come in lower at $934.1M. But the profit number was the big surprise: It amounts to 13 cents a share — a contrast to forecasts for a 13 cent loss. Investors also will be surprised by the subscription numbers. Netflix ended 2012 with 27.15M domestic streaming customers, an increase of 2.05M vs the previous quarter. That’s well ahead of company guidance, and analyst predictions for a 1.7M increase. International also was strong with 6.12M subscribers, +1.81M — beating the company’s most optimistic forecast for +1.44M. The good news extended to domestic DVD rentals. Netflix says 8.22M people subscribe, a loss of 380,000; the company had said it might lose at least 458,000. “The fact that our growth remains this strong despite intensifying competition, and our already substantial U.S. market penetration, underlines the large opportunity ahead,” CEO Reed Hastings and CFO David Wells say in their quarterly note to shareholders.
Netflix CEO Reed Hastings sometimes deals with investors in quirky ways — and one instance involving a Facebook posting may prove to be too quirky for regulators who oversee the securities markets. The streaming company just disclosed that SEC staff sent a “Wells Notice,” a warning that they will recommend to the commission that it institute a cease and desist proceeding or bring a civil action against Hastings for violating fair disclosure rules. Hastings says (yes, in a Facebook post) that the matter involves a message in July that Netflix subscribers streamed 1B hours of content in June. When Hastings made the comment on Facebook, he didn’t also communicate with the Street in a more formal, and conventional, way — with a public filing at the SEC. The filings are supposed to guarantee that companies disclose material information to all investors equally, not selectively to a few. Hastings says he believes that his posting to more than 200,000 Facebook fans “is very public, especially because many of my subscribers are reporters and bloggers.” In addition he says that “we think the fact of 1 billion hours of viewing in June was not ‘material’ to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.” Although Netflix shares rose the day of his disclosure, Hastings says that the movement began earlier in the day and was “likely driven by the positive Citigroup research report the evening before.” He adds that he’s “optimistic this can be cleared up quickly through the SEC’s review process.”
Netflix CEO Reed Hastings says “Amazon is the best competitor we’ve ever faced” — but he estimates his retail rival is losing between $500 million and $1 billion a year on its streaming content, according to a report on AllThingsD. Hastings says he bases those figures on the value of content deals Amazon won when the rivals competed head-to-head. To become a real threat, Hastings says Amazon CEO Jeff Bezos will have to spend a lot more money. Netflix has said it plans to spend $2.1 billion on content over the next year. Amazon spokesman Andrew Herdener responded to Hastings’ remarks via email: “We don’t comment on our individual investments but it’s correct that Prime Instant Video is an amazing value for customers. Not only do Prime members get unlimited streaming video, but they also get free 2-day shipping and the Kindle Owners’ Lending Library as well.” Last week broadband service company Sandvine pegged Netflix’s share of Internet traffic at 33% and Amazon’s at 1.8%. Netflix’s stock closed virtually unchanged today at $80.90 down 0.71%.
Hastings also responded to investor Carl Icahn, who recently acquired almost 10% of Netflix and contends the company should be acquired by a larger firm. “We think we can make it in the long term absolutely on our own — we’ve been doing that for 10 years,” Hastings says, noting that …
Lots of Netflix investors seem to believe that the corporate raider has enough ideas and juice to revive the video rental company, which is struggling to secure its place in the media ecosystem. Shares only retreated 3% since Wednesday, when they popped 13.8% on the startling news that Icahn bought stock and call options that could give him 9.98% of the company. That resulted in widespread speculation that the legendary crusader for shareholder value has a plan to force Netflix to take a new direction following nearly a year and a half period during which Netflix lost 74% of its market value.
Well, if he does, then it will be interesting to see what it is — and how he might prevail if he crosses swords with CEO Reed Hastings. Icahn has fewer options than people think.
Potent anti-takeover provisions in Netflix’s by-laws would make it difficult to wage a hostile effort to take over the board. The company’s staggered elections mean that only a third of the directors are replaced each year. What’s more, Netflix doesn’t allow shareholders to call a special election to pick new directors. If Icahn continues to buy stock, the company can exercise what’s known as a poison pill — a provision that gives the board the right to flood the market with up to 10M preferred shares, diluting the value of his holdings. Corporate law in Delaware, where Netflix is incorporated, also bars companies from combining with a holder of more than 15% of its stock unless the holder has had the shares for at least three years — unless the board approves the transaction.
Investors see Netflix‘s disappointing subscriber growth as a glass half empty, and today CEO Reed Hastings apparently wants to persuade the public that it’s more than half full. That’s the only reason I can think of for announcing that the company has more than 30M subs globally including more than 25M in the U.S. It’s no surprise. The number is just a tad higher than the figures Netflix reported two days ago for the end of Q3: It said that it had 25.1M domestic streaming subscribers and an additional 4.3M abroad. That irked Wall Street because it meant the company had to cut its forecast for domestic sub growth in 2012 to about 5M from 7M. “We own it in terms of a bad forecast,” Hastings said on Tuesday. “But in terms of actual performance of the business, to grow 5 million net adds domestic is substantial and we feel good about that and about the growth next year.” That’s the theme he’s reinforcing today in a Facebook posting thanking Netflix customers.
The Netflix founder joined the Microsoft board in 2007 and is now its lead independent director. But he has taken himself out of the running for re-election when the software company’s shareholders meet in November. “I’ve decided to reduce the number of boards I serve on, so that I can focus on Netflix and on my education work,” he says. Hastings also sits on the boards of Facebook, Dreambox Learning, the Knowledge Is Power Program, and the California Charter Schools Association — as well as Netflix. Microsoft CEO Steve Ballmer says that Hastings “has been a terrific board member, and his insights and experience have really helped guide us through a critical period of transformation for both Microsoft and the industry.”
Time Warner CEO Jeff Bewkes just threw a bucket of ice water on the idea that Netflix chief Reed Hastings raised last week in his quarterly letter to shareholders. “While we compete for content and viewing time with HBO, it is also possible we will find opportunities to work together – just as we do with other networks,” Hastings said. “Consumers who are passionate about movies and TV shows are quite willing to subscribe to multiple services.” Perhaps. But Bewkes isn’t interested in seeing HBO programming appear on Netflix just yet. “There are not talks going on between HBO and Netflix,” he said in his quarterly call with analysts. Although he acknowledges that “sometimes other relationships emerge over time” between competitors, when it comes to Netflix he added: “Not now.”
Netflix shares rose 13% today after a the market took yesterday off due to the July 4 holiday, closing at $81.72 thanks to the company’s biggest single-day gain since late January. The surge comes a couple of days after CEO Reed Hastings said in a Facebook entry that Netflix’s monthly viewing eclipsed 1 billion hours in June, which BTIG analyst Rich Greenfield calculated would have made Netflix ”the 7th most watched network inclusive of broadcast and cable networks (up from No. 15 in Q4 2011). Hastings said the company will “blow these records away” when new original series House Of Cards and Arrested Development arrive. The Street has agreed with the bullish outlook ever since, with shares rising 6.2% on Tuesday when Hastings posted. Today’s gains put Netflix’s stock price up 18% overall in 2012, according to Bloomberg, as a significant company milestone approaches: It was July 12, 2011, that Netflix announced a plan to split streaming and DVD rentals into separate businesses — with a 60% price hike for people who wanted to keep both services. At the time, shares traded close to $300.
It was the first time the streaming service has pumped out so much content in a month according to a post that CEO Reed Hastings made on his Facebook page. “Congrats to [Chief Content Officer] Ted Sarandos, and his amazing content licensing team,” Hastings wrote. He added: “When House of Cards and Arrested Development debut, we’ll blow these records away. Keep going, Ted, we need even more!” BTIG’s Richard Greenfield made some back-of-the-envelope calculations and figures that Hastings’ data means the average Netflix subscriber watched it 80 minutes a day — up from 64 minutes a day in the last three months of 2011. If true, he says, then ”Netflix would have been the 7th most watched network inclusive of broadcast and cable networks (up from#15 in Q4 2011). It also would have been #2 among cable networks, slightly larger than ESPN and just below Disney Channel.” Hastings’ news, along with an upbeat report today from Citigroup’s Mark Mahaney, contributed to a 6.2% jump in Netflix shares to $72.04. That’s not bad. But here’s something worth remembering as we approach the anniversary of Netflix’s July 12 announcement of its plan to split the streaming and DVD rentals into separate businesses, with a 60% price hike for people who wanted to keep both services. A year ago the company shares traded for close to $300.
UPDATE, 4:13 PM: Netflix CEO Reed Hastings has some good news for Hollywood: Despite his company’s struggles, he plans to keep spending “aggressively” on content, he told analysts in a conference call. “We have a small fraction of the content that we would like to have.” He pegged the spending rate at “slightly less than revenue growth.” That could include deals like the one Netflix struck with DreamWorks Animation to offer its movies in the premium TV window. Most of the studio deals with channels such as HBO and Starz expire in 2014 and 2014 and “as far as I know, no one else has the right of first refusal.” Hastings also is in the market for original shows. Although “it’s not yet hugely significant” for Netflix, as it adds shows such as House Of Cards — which will debut next year — “it will build to a nice percentage of our total viewing.” Meanwhile, Hastings says he’s pleased with the performance of his exclusive programs. For example, the Norwegian TV drama Lillyhammer, which stars Steven Van Zandt, “was quite successful for the amount we invested in it.” He says that the program licensing deals he’s making now largely are exclusive because “other bidders will not take that content if we also have it, so they’re de facto exclusive.” Although he doesn’t envision having all-exclusive programming, “certainly there’ll be more and more.”
If you’re a Netflix investor, you might want to reach for some pills to control your blood pressure. Although the home video company lost 62.5% of its market value last year, CEO Reed Hastings did just fine — as did all of the other top executives named in the proxy that Netflix filed today at the SEC. True, Hastings’ salary was cut 3.7% to $500,000. The document says that the Compensation Committee “took into account the Company’s performance during 2011 and reduced the Chief Executive Officer’s total compensation by $1.5 million.” But Hastings shouldn’t feel much pain. His stock option award was up nearly 76% to $8.8M. All of the company’s other top execs also made more in 2011 than they did the previous year — collectively they were up 27.6%. Hastings’s compensation accounted for 40% of the pay for the company’s five top execs. His take was about 2.7 times the average for his colleagues. Corporate governance activists become skeptical when the CEO
Execs often say they hate government regulation, but sing a different tune when officials scrutinize a competitor. That’s why it was so surprising to hear Netflix CEO Reed Hastings say that he wants the UK Competition Commission to keep out of his battle with BSkyB — his most formidable streaming video rival in the market that Netflix entered in January. “We are aiming for a fair fight,” he said at a conference yesterday The Guardian reports. “One of the big advantages is that we are £5.99 (per month), that is a fundamental difference in positioning. Frankly we think many people will get Netflix in addition to (BSkyB’s) Sky Movies or Sky Atlantic.” The Competition Commission has already provisionally determined that BSkyB’s premium TV deals with all of the major Hollywood studios are too restrictive. But last week the regulators said that they would extend their review of the market to July so they could
The story took off, and now seems to be crashing, even faster than Herman Cain’s presidential campaign. Pay TV’s three biggest distributors — Comcast, DirecTV, and Dish Network — aren’t interested in carrying Netflix, industry news service SNL Kagan reports. That could dampen some of the excitement about the idea that built up this week after Reuters said that Netflix CEO Reed Hastings “has quietly met with some of the largest U.S. cable companies in recent weeks” to talk about having them offer his video streaming service. It added that by year end at least one cable company could offer Netflix on an experimental basis. The story grabbed everyone’s attention: Hastings recently told an investor group that cable operators would love to become less dependant on HBO — and offering his streaming service “might be very powerful, especially as we have more original content.”
Last week, Netflix CEO Reed Hastings said that the prospect of having cable operators offer his streaming video service to their customers was “not in the short term” as a possibility — but was “in the natural direction in the long term.” His definition of “short” and “long” is open to debate, though: He’s already in talks with “some of the largest U.S. cable companies,” Reuters reports. It adds that by year end at least one cable company could offer Netflix on an experimental basis. The story doesn’t identify the operators negotiating with Netflix; Comcast recently unveiled its own online video service called Streampix. A Netflix-cable alliance could diminish the talk about cord-cutting. Some analysts say that pay TV subscribers looking to save money increasingly will cancel the $65-a-month video service and replace it with Netflix’s $7.99-a-month package, which mostly consists of older TV shows and movies. It also would give cable subscribers an alternative to premium channels led by HBO.
Pay TV providers already “know how to deal with HBO and would like to have a competitor to HBO,” Netflix CEO Reed Hastings said today at the Morgan Stanley Technology, Media, and Telecom Conference. So even though he doesn’t expect Netflix to join the pay TV line-up as a premium channel any time soon, “it’s in the natural direction in the long term” and “might be very powerful, especially as we have more original content.” But Hastings won’t give up the company in return for carriage, the way many cable channels have. Also he says that in any distribution arrangement it’s important that “the consumer knows they’re using Netflix and have our application on the TV.” Meanwhile, he says that cable operators have good reason to like having Netflix on broadband — despite their frequent complaint that the video service is a bandwidth hog. “They’re making a fortune,” he says. “Comcast and others are selling a (broadband) service for $40, $50, $60, $70 a month with no content costs.”
UPDATE, 4:03 PM: Netflix CEO Reed Hastings has good news for Hollywood: He plans to keep buying movies and TV shows for his streaming service “for a very long time,” he told analysts in a conference call. He’s remains mostly interested in prior season or older TV re-runs as opposed to recent and original shows; the lower cost makes it easier for Netflix to keep the price of its streaming service at $7.99 a month. He also wants to differentiate Netflix from cable and satellite TV Everywhere plans to stream current content to their subscribers. Some competition is inevitable: Most of the time he has to bid for programming against cable channels — and the pattern in the industry is to buy exclusive rights. Still, “we will continue to be an active bidder in that market.” Hastings also defended his strategy of offering all episodes of a TV series at the same time instead of mimicking conventional TV and introducing them one at a time. Netflix is about “binge viewing,” he says. “We’re not particularly focused on a particular show to drive retention.” He rejected the idea of offering titles on a pay-per-view basis. That would “confuse the brand,” he says. Wall Street’s concerned: Netflix’s programming outlays were 100% higher in the last three months of 2011 than they were in the same period in 2010. “We feel great about the content we’ve got,” Hastings told analysts. “We …
A hard-hitting report today from Wedbush Securities analyst Michael Pachter seemed to reignite investor fears about Netflix ahead of Wednesday afternoon, when the home video company will release its 4Q results. The analyst, who has an “underperform” rating on the stock, says Netflix may tell the Street that its losses in the current quarter will come close to 62 cents a share as opposed to the consensus forecast of a 29 cent loss. The tip-off for him was Netflix’s decision in November to sell $400M worth of stock and notes that can be converted into stock. Pachter says Netflix had to “raise capital at less-than-optimal terms.” The reason: When the company radically revamped its prices in July, many customers who used to pay $9.99 a month to both stream video and borrow DVDs decided to pay $7.99 to do one or the other. But the streaming video licensing deals Netflix cut last year will mean that its costs will “continue to rise materially, further pressuring margin and profits.”
If Pachter is right, then it could cast a pall on what’s been an encouraging month. Netflix shares are up 35.6% so far in January as many investors started to believe that the worst is over for the company, which has lost 67.8% of its value since July. Some analysts are more upbeat than Pachter. This morning, Sterne Agee’s Arvind Bhatia, who rates Netflix as “neutral,” said that he believes the 4Q report could beat expectations. …