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Netflix In Challenging Market

Posted on Monday, Apr 30th 2012

Market reports estimate that over 180 million users of the Internet in the US watch online video content. Within the U.S., 44 billion videos are viewed each month. Netflix remains the leader within the online video-by-subscription segment. According to NPD research, Netflix accounted for a 55% share in the digital movie rental business as of early this year. The market share has declined since the middle of last year, when the company controlled 59% of the U.S. market.

Netflix’s Financials
Netflix’s (NASDAQ: NFLX) first quarter revenues grew 21% over the year to $869.8 million, ahead of the market’s expectations of $867 million. But the company’s earnings are hurting. The first since 2005, the company reported a loss of $0.08 per share. A year ago, Netflix had earned $1.11 per share. The Street was looking for a loss of $0.28 per share.

Domestic revenues grew 17% over the year to $826.4 million while International revenues grew 253% over the year to $43.4 million. During the quarter, they added 1.7 million subscribers in the U.S. and ended saw total subscriber base grow 23.3% over the year to 29.1 million.

For the current quarter, Netflix projected revenues of $873-$895 million with earnings ranging from a loss of $0.10 per share to profits of $0.14 per share. Wall Street was looking for a loss of $0.18 per share. Netflix expects to end the current quarter with 23.6-24.2 million domestic subscribers and 3.45-4.0 million international subscribers. Netflix expects to end the current year with revenues of $2.47 billion and EPS of $3.31. The market was looking for revenues of $2.48 billion with an EPS of $3.33.

Netflix’s Growing Domestic Competition
The domestic market is becoming a tougher market for Netflix. With Amazon and Hulu already in the running, recently, other cable giants also entered the market. Comcast launched Streampix, a service claimed to be “Netflix-Like” as it lets the viewer stream content anywhere. Streampix is available to all Comcast double or triple player subscribers for free and is available to other Comcast users at a nominal charge of $4.99 a month. Netflix does not seem to be worried about Streampix for now but is definitely concerned about Comcast’s data cap rules. Comcast restricts data download on residential accounts to 250 GB per month. However, they have removed that cap for all the users of the Xfinity Xbox app while maintaining the restriction on the Netflix Xbox app. Besides Comcast, Verizon and Coinstar also announced their plans to enter into a joint-venture to launch similar services by the end of this year.

Netflix’s Global Expansion
To counter the growing domestic market worries, Netflix remains focused on international expansion. Over the last few quarters, Netflix began operations in the U.K., Ireland, Canada and Latin America. The management is happy with Netflix’s performance in these markets, except for Latin America. They now realize that profits in Latin America will take longer to accrue due to the region’s infrastructure weaknesses, especially the broadband penetration and difficulty setting up payment transactions on the Net. Netflix is deepening its presence in Latin America by ensuring availability of subtitles on nearly all of the non-kids segment content. But, despite these worries, Netflix is planning to enter into one more European market by the end of this year.

But increasing competition, slower acquisition of new consumers and the ever present pricing pressure is wreaking havoc on Netflix’s stock prices. After having touched a life high of $304.79 in July last year, Netflix’s stock is now trading at $83.74 with a market capitalization of $4.65 billion.

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