Netflix Gains as Movie-Rental Customers Top 20 Million

Netflix Inc. rose 15 percent in Nasdaq Stock Market trading to an all-time high after the movie-rental service said it surpassed 20 million subscribers and forecast faster growth than analysts projected.

Netflix, which delivers movies online and DVDs by mail, rose $27.84 to $210.87 at 4 p.m. New York time. The Los Gatos, California-based company reported yesterday a 52 percent rise in fourth-quarter earnings.

Chief Executive Officer Reed Hastings is expanding outside the U.S. and adding online content to reduce the cost of mailing DVDs. As more people subscribe, it’s becoming easier to obtain rights from Hollywood studios to air films and television shows over the Internet, Hastings told investors on a conference call.

Netflix will “steadily” announce new or expanded multiyear content agreements every few months this year, Hastings said in an interview.

First-quarter earnings may rise to $49 million to $62 million, or 90 cents to $1.13 a share, the company forecast. Revenue will be $684 million to $704 million, Netflix said. The projections exceeded analysts’ estimates for profit of $46.5 million, or 87 cents a share, on sales of $677.8 million.

The forecast was given as Netflix reported a jump in fourth-quarter net income to $47.1 million, or 87 cents a share, from $30.9 million, or 56 cents, a year earlier. Analysts had projected profit of 71 cents, the average of 26 estimates compiled by Bloomberg. Sales climbed 34 percent to $595.9 million, compared with an analysts’ estimate of $597.8 million.

Profit Forecast

In the U.S., the company said it expects to end March with 21.9 million to 22.8 million subscribers.

U.S. subscribers will reach 27 million by the end of 2011, based on Netflix’s statement that “domestic net additions will continue to grow” in 2011, Ingrid Chung, an analyst with Goldman Sachs Group Inc., said in an e-mail after the results.

“Their guidance is great,” said Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles, who recommends selling the shares. “The market appears to be ignoring the international losses and the lack of clarity about how much it will cost to renew their content deals.”

Netflix faces competition from Inc., which offers online film rentals and agreed last week to buy the rest of LoveFilm International Ltd., a U.K.-based subscription service offering DVDs by mail and online.

Outside the U.S., Netflix forecast first-quarter subscribers of 750,000 to 900,000. Sales will reach $10 million to $13 million, and international operating losses will be $10 million to $14 million.

International Moves

Expanding beyond Canada, its first non-U.S. market, will result in about $50 million in international operating losses in the second half, Netflix said. The Canadian business should post an operating profit in the third quarter, the company said.

Netflix added 3.08 million customers in the fourth quarter, to end 2010 with just over 20 million subscribers and beat the October forecast of 19 million to 19.7 million. Compared with the fourth quarter of 2009, clients grew 63 percent.

Hastings, 50, is spending more for online content as he seeks to provide more movies and TV shows over the Internet and reduce costs tied to mailing DVDs. In November, the company started raising subscription prices for mail delivery of discs and added a lower-cost online-only option.

The increases haven’t had a material effect on Netflix, Hastings said on the conference call.

Starz Deal

One challenge for Netflix is maintaining its access to online content, according to Pachter.

Liberty Media Corp.’s Starz premium cable channel supplies Netflix with movies from Sony Corp. and Walt Disney Co. in an agreement that expires in the first quarter of 2012.

“Carrying Starz is one of our most important deals,” Netflix said on its website. “We’ll be working with Starz over this year to explore renewal options.”

Netflix plans to begin enforcing limits on accounts that will prevent users from streaming multiple films and TV shows at the same time, Hastings said in the interview. The company will begin selling upgrades that include second subscriptions and accounts that permit multiple streams, Hastings said.

“We’re not sure how big an opportunity that will be just yet,” Hastings said. “It could be like e-mail. Ten years ago many couples had joint e-mail accounts, but nobody does that today.”

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