Good News From Netflix

Netflix (NASDAQ: NFLX) does not seem to be affected by the recession, at least going by its Q4 results announced on January 26. The company’s stock rose 16% to $34.82 after the results announcement. It had crashed to a record low of $17.90 in October.

Q4 revenues of $360 million recorded significant 19% growth over the year and came in above the Street’s expectations of $350 million. EPS of $0.41 grew 52% over the year and beat the market’s expectations of $0.31.

For the year, revenues stood at $1.4 billion and grew 17%. EPS of $1.44 grew 33% and beat the market’s expectations of $1.25.

Netflix ended the quarter with 9.39 million subscribers, up 26% from 7.48 million last year. Subscriber churn rate was 4.2%, compared with 4.1% a year ago. Netflix now has nearly 60 distribution centers across the United States and is able to provide delivery to over 97% of their subscribers within one business day.

They repurchased nearly 0.5 million shares for $10 million in the quarter. For the year, they repurchased 7.3 million shares.

The company was pleasantly surprised by the growth in its subscriber base, which was propelled by its marketing efforts and alliance with LG Electronics. The introduction of multifunction CE (consumer electronics devices from Samsung, Microsoftand TiVo also helped promote Netflix streaming.

Netflix expects its DVD and Blu-ray shipments to continue to grow in 2009 as a result of improved service. The company came in on top of 4C results ranking of customer satisfaction for eCommerce, tying with Amazon for first place.

Netflix is continuing to invest in streaming content. It will now include Starz Play in all premium plans, which includes the major films of Sony and Disney. The company now has over 12,000 movie and TV choices, which is a significant increase from the 2,000 titles available two years ago.

Netflix is convinced of the strength of its model of a DVD/streaming combination subscription, as it said in the earnings call that most of their CE-generated subscribers also rent DVDs from Netflix. The company is deepening its relationships with CE manufacturers and is now going to be available on the wider range of Blu-ray models being launched in the coming year. Netflix also announced its first partnership with LCD and plasma screen maker Vizio – the Netflix application will be included in Vizio televisions.

Netflix is not troubled by Roku’s recent announcement that it will update its digital video players to include Amazon’s Pay-Per-View service in addition to the Netflix application. The company sees three primary economic models for streaming: ad-supported (Hulu, YouTube), Pay-Per-View (Amazon, Apple) and subscriptions (Netflix). With Roku’s announcement, Netflix realizes that it will be challenged by the additional competition, but it sees a bigger benefit from the fact that now Amazon will also be promoting Roku’s device. Further, since the Pay-Per-View business is more focused on big new releases and Netflix does not deal with these releases, competition should be more indirect in nature.

Netflix is targeting net income to grow at least 12% for the full year 2009 and is looking at Q1 revenues of $387-$393 million and 2009 revenues of $1.58-$1.64 billion.

The stock is currently trading around $37.93 with a market cap of $2.23 billion.