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Netflix Blunts Skeptics as New Users Propel 132% Gain

Netflix Inc. Chief Executive Officer Reed Hastings said, “We’re just working really hard to make the best service we can.” Photographer: Norm Betts/Bloomberg
Netflix Inc. Chief Executive Officer Reed Hastings said, “We’re just working really hard to make the best service we can.” Photographer: Norm Betts/Bloomberg

April 23 (Bloomberg) -- Netflix Inc., vanquishing Wall Street skepticism about its growth prospects, became the best-performing stock in the Standard & Poor’s 500 index after signing up more than 2 million new U.S. customers.

Netflix soared 24 percent today after U.S. subscriber gains beat analysts’ estimates yesterday and the Los Gatos, California-based online video service added 1 million internationally. The stock’s 2013 rise of 134 percent is the highest among S&P 500 index companies.

Chief Executive Officer Reed Hastings has positioned Netflix as the undisputed leader in online video, recovering momentum he lost two years ago after pricing and product missteps, by adding original shows and exclusive studio deals. With 29.2 million U.S. customers, Netflix has passed Time Warner Inc.’s HBO, according to data from SNL Kagan. Hastings said he wants to reach as many as 90 million in the U.S.

“We’re just working really hard to make the best service we can,” Hastings said in an interview. “To grow by 3 million subscribers globally in one quarter is just phenomenal. People want click-and-watch Internet video.”

Netflix rose to $216.99 at the close in New York, the highest since September 2011, after reporting first-quarter results late yesterday. Before today, the stock had gained 88 percent this year, second to Best Buy Co. in the S&P 500.

‘Growing Confidence’

“The investor community believes they’re on a path back towards the levels of profitability seen in 2010 and 2011,” said Michael Olson, a Piper Jaffray Cos. analyst in Minneapolis who has a neutral rating on the stock. “This is a result of growing confidence that originals can create an increasingly exclusive offering, which will attract subs and reduce churn.”

Analysts had estimated Netflix would end the quarter with 29 million online U.S. users, the average of seven estimates compiled by Bloomberg. The company gained 1.02 million international subscribers, reaching 7.14 million, according to yesterday’s statement, and said it will expand in another unnamed European market later this year.

Original programs such as the political drama “House of Cards” with Kevin Spacey and Robin Wright, are helping Netflix attract and keep new customers.

“The launch of ‘House of Cards’ provided a halo effect on our entire service,” Hastings wrote in a letter to investors.

Worldwide Gains

Netflix began showing all 13 episodes of “Hemlock Grove” on April 19, and Hastings said the horror series is already beating viewing records set by “House of Cards.” The company has been investing in original shows to bolster its library of films and TV reruns to stand out from competitors such as Amazon.com Inc., the largest Web retailer, and Hulu LLC.

First-quarter net income, including an expense for debt retirement, totaled $2.69 million, or 5 cents a share, compared with a loss of $4.6 million, or 8 cents, a year earlier. Sales rose 18 percent to $1.02 billion from $869.8 million a year earlier, matching analysts’ estimates. It was the first time revenue topped $1 billion.

International streaming revenue more than tripled from a year earlier to $142 million and contributed 14 percent of total sales, according to the company.

This quarter, the company forecasts new U.S. subscribers to increase by as much as 880,000, reaching up to 30.05 million, Hastings wrote.

Netflix expects profit of $14 million to $29 million, or 23 cents to 48 cents a share. That compares with analysts’ projections of 30 cents, the average of 28 estimates.

Stock Tumble

The company also said it would introduce an $11.99-a-month plan that lets users receive four different streams to Web-connected devices, Hastings said, adding he expects fewer than 1 percent of customers to upgrade.

Analysts had suggested Netflix might offer a range of plans, including individual accounts, surcharges for additional users or some combination, to increase revenue and margins. As many as 10 million people watch the online video service without paying, according to Michael Pachter, a Wedbush Securities analyst in Los Angeles.

Two years ago, the company fell into a downward spiral after angering customers by raising prices and trying to split its online streaming business from the DVD-by-mail service.

That led to a quarterly loss of 800,000 domestic customers, and the stock tumbled from an all-time closing high of $298.73 in July 2011 to a low of $53.80 last September. In January, Hastings said the company was about halfway through its probation with customers.

“In terms of brand recovery, it’s been just as we had hoped and thought and expected, which is sort of over three years,” Hastings said yesterday on a conference call with analysts. “And we’re making steady progress.”

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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