Netflix Soars as Hastings Seeks to Damp ‘Euphoria’Cliff Edwards
Netflix Inc., the biggest gainer in the Standard & Poor’s 500 Index this year, pressed further into record territory after reporting quarterly results that beat analysts’ estimates.
The shares jumped 6.4 percent to $369.28 at 9:54 a.m. New York time after rising 9.6 percent, the largest intraday increase in six months. The Los Gatos, California-based company has almost quadrupled this year.
Subscriber growth at Netflix’s Web-based streaming service surpassed both analysts’ expectations and the premium cable-TV network HBO in the U.S., driven by original shows such as the prison dramedy “Orange Is the New Black.” Chief Executive Officer Reed Hastings attributed the stock rise to investor “euphoria,” while setting his sights on HBO’s global subscriber count.
“The real number we’re looking at is their 114 million, and we’re at 40 million,” Hastings said. “So we’ve got a ways to go.”
Netflix, the world’s largest online subscription-streaming service, said yesterday after markets closed that third-quarter profit increased fourfold to 52 cents a share, beating the 47-cent average of 27 analysts’ estimates.
Including free trials, domestic users rose 4.3 percent to 31.1 million from the second quarter, surpassing the 31 million average of eight estimates compiled by Bloomberg. Outside the U.S., the total reached 9.2 million.
“Netflix is a subscriber-driven story for investors,” said Paul Sweeney, an analyst with Bloomberg Industries. “The third-quarter results again demonstrate that story is fully intact.”
The results suggest Netflix’s Web-based service has growth potential beyond that of premium cable-TV networks. Hastings is offering a mix of original programs and unlimited viewing of movies and TV shows for $7.99 a month. He has begun talks to bring Netflix to cable-TV systems in the U.S., after reaching initial deals in Sweden and the U.K.
While the stock has been volatile, the company has increased its membership every year, he said.
“The progress we’ve made over the last 10 years is stunning,” Hastings said. “We want to make the next 10 years even more remarkable.”
Hastings estimates Netflix can reach 60 million to 90 million streaming members in the U.S. Over time, the majority of Netflix’s revenue will come from overseas, Hastings said.
The company expects to double its spending on original content next year, Hastings said, and may raise money to pay for it.
“Since we are otherwise using domestic profits to fund international markets, we will raise capital as needed to fund the growth of original content,” Hastings wrote in a letter to shareholders. He declined to elaborate.
Netflix also said it’s changing the accounting for original shows that premiere on its service, which will result in costs being recorded sooner.
Third-quarter net income jumped to $31.8 million from $7.68 million, or 13 cents a share, a year earlier.
Sales increased 22 percent to $1.11 billion from $905.1 million a year ago, beating estimates of $1.1 billion.
Hastings has hooked viewers with original programs such as the Emmy-winning “House of Cards.” The company has also reached deals to get exclusive movies from Walt Disney Co. and DreamWorks Animation SKG Inc.
Netflix is becoming “more comfortable” with the idea of owning shows in the future, rather than licensing them for set periods, Chief Content Officer Ted Sarandos said in a video interview after the results. Original programs build interest in the service and attract audiences over time, he said. The company is actively looking to produce original movies, he said.
While “Orange Is the New Black” spurred subscriber growth, a bigger percentage of Netflix viewing is generated by full-season reruns of shows such as “Breaking Bad,” “The Walking Dead” and “Pretty Little Liars,” Hastings wrote.
The company began service in the Netherlands during the quarter, bolstering international subscriber of 1.4 million. Netflix projected total worldwide users may reach 43.6 million in the fourth quarter, the midpoint of its forecast, including 10.5 million outside the U.S.
Netflix forecasts fourth-quarter profit will range from $29 million, or 47 cents a share, to as much as $45 million, or 73 cents, above projections averaging 45 cents a share.
In the U.S., paid subscribers totaled 29.9 million, Netflix said. That’s an increase from 28.6 million as of June 30, and puts Netflix ahead of Time Warner Inc.’s HBO, which has about 28.7 million, according to researcher SNL Kagan.
Hastings is following the path of the older network, which he regards as his closest U.S. competitor. Thirty years ago, HBO aired its first original movie, a 1983 biopic of Canadian amputee and runner Terry Fox. Like HBO, Netflix has used original programming to build customer loyalty and to stand out from competitors such as Amazon.com Inc., the largest Web retailer, Hulu LLC and Redbox Instant by Verizon.
While the number of streaming subscribers is growing, the DVD business, which shrank 4.8 percent sequentially, “is declining more rapidly than we expected,” said Michael Pachter, an analyst with Wedbush Securities, who rates the stock underperform.
“The valuation makes no sense at all,” Pachter said.