Netflix

According to the IHS Screen Digest, during the current year, the number of movies and TV shows streamed and downloaded legally in the U.S. will exceed the number of DVDs and Blu-Ray disc sold this year. Digital streaming will account for 3.4 billion transactions in 2012, reporting a growth of 135% over the year. Analyst expect that 2.4 billion DVD and Blu-ray discs will be sold this year.

 Netflix’s Financials
Netflix’s (NASDAQ: NFLX) Q3 revenues grew 10% over the year to $905.1 million, marginally ahead of market’s expectations of $905 million. EPS of $0.13 was significantly ahead of the Street’s targeted earnings of $0.04.

But the market is worried about the slow addition of new subscribers. During the last quarter, Netflix added 1.16 million subscribers in the U.S. and 700,000 subscribers internationally, ending the quarter with more than 30 million subscribers. Earlier, Netflix had projected an addition of 1.1 million-1.8 million subscribers during the quarter to target growth of 7 million streaming customers for the year. However, the slow growth during the quarter, has led them to revise their projections downwards. Netflix now expects to end the year with a growth of 5.4 million subscribers.

For the current quarter, Netflix expects to earn revenues of $919 million-$943 million, missing analyst estimates of $943.5 million. It projected a loss of $0.23 to a profit of $0.04 for the quarter, compared with Street’s projections of a loss of $0.08 for the quarter.

Mounting Cost Pressures Hurt Netflix
Netflix remains focused on growing operations internationally. They are now available in 51 countries. During the last quarter, they added services to Sweden, Norway, Denmark, and Finland. But, international expansion is coming at a high cost. During the last quarter, investment in international operations contributed to their 88% drop in earnings.

Besides geographic growth, maintaining its current library of content is also becoming a bigger challenge for earnings. Content acquisition costs for Netflix grew from $3.5 billion a year ago to $5.0 billion. Of this, Netflix is obliged to pay $2.1 billion due within the next year, creating a liquidity issue for them. But, after a failed attempt to increase prices more than a year ago, Netflix’s management does not plan to increase subscription prices to cover for the increasing costs.

Instead, Netflix is developing original content and chosing their content deals based on their viewership statistics. Recently, they decided to forego the opportunity for an exclusive deal with Epix, citing that viewership of Epix content accounted for only 5% of the subscriber base. Instead, Netflix plans to invest that money on television titles, since nearly 67% of their streaming content is focused on TV shows.

Meanwhile, recent market rumors suggest that Microsoft may be looking to buy Netflix. For now, neither company has commented on the news, but an acquisition may help them tide over liquidity concerns.

Netflix’s stock is trading at $69.58 with a market capitalization of $3.86 billion. It reached a year high of $133.43 in February this year.