Netflix To Post Loss In Q1, Subscriber Count In Focus

 
on April 21 2012 7:52 AM

Home entertainment company Netflix Inc. is expected to post a loss for the first time in the last seven years, according to Wall Street analysts. Netflix Q1 results will be out Monday, and analysts predict the entertainment trendsetter will lose 27 cents per share.

In its projections for the first three months of the year, Netflix has hinted that the probable loss would be anywhere between $9 million and $27 million.

The company is forced to see red mainly because of the strategic missteps it took last year, including a steep rise in prices that caused subscriber outrage, leading to a huge number of cancellations. The company lost around 800,000 subscribers in the third quarter of last year, but it was thought that it could recuperate in the last quarter when it added 600,000 subscribers.

What to look for: The subscriber count of the Los Gatos, Calif.-based company will get more attention in Q1 than will its actual net profits this year. Netflix has already signaled a large expected loss forecast, citing its heavy investment in overseas expansion.

Subscriber count is a crucial parameter to judge the company's prospects mainly because Netflix has announced a shift of focus to Internet-only video streaming and the phasing out of its DVD-by-mail service. With not much revenue from advertisements and affiliate services, Netflix is forced to depend heavily on subscription revenues to finance its content and expansion expenses. Therefore, an active subsciber base will be crucial for the company to head forward.

Netflix had 24.4 million U.S. subscribers for its live-streaming and DVD-by-mail plans, and another 1.9 million non-US customers at the beginning of the year.

The company expects to add up to 1.9 million U.S. streaming subscribers in the quarter while losing as many as 1.8 million DVD customers. Internationally, it projects a gain of up to 1.2 million subscribers, according to a Reuters report.

Challenges: The biggest challenge ahead for the company is to raise its subscription base for online video streaming and to bolster content quantity and quality further. CEO Reed Hastings believes that the process is like a cycle and once the subscriber base starts expanding, it will enhance the content quantity and quality.

As we get more subscribers, we're able to get more content, which then helps us get more subscribers, Hastings told analysts on a January conference call. The company will buy more titles to improve the service for a very long time, he said, according to the Reuters report.

According to a Business Week report quoting analyst Michael Pachter of Wedbush Securities, Netflix will have to continue to increase its marketing budget to attract more subscribers in the face of increased competition and to overcome the recent loss of a licensing deal to stream content from Starz Entertainment. 

The 3-year-old Starz deal expired Feb. 29, depriving Netflix's Internet video library of some of its most popular fare, the report said.

Another concern is the rising content cost. Netflix's focus on its Internet video service requires it to source quality content, and the expenses on license fees are expected to rise steadily. Content management and delivery charges are also speculated to rise with the expansion of its overseas services. This is expected to put pressure on Netflix's subscription revenue.

In a variety.com report, Barclays Equity Research analyst Anthony DiClemente said: While rising digital content costs are not surprising given Netflix's shift to a streaming-only company, we believe Netflix's mounting off-balance-sheet obligations add a greater level of risk to future earnings and liquidity in 2013 and beyond, which will have to be supported through continued subscriber growth.

Netflix has been aggressively expanding its services. It has launched its services in Latin America, Canada and the UK, and it is facing tough competition from Amazon's Lovefilm and BSkyB, Reuters reported.

Netflix was one of the most coveted shares in the US market but its shares dropped from $304.79 in July to $62.37 in November, according to the Reuters report.

The company's shares closed at $106.11 on NASDAQ.

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