Netflix reported a knockout fiscal fourth quarter and saw its number of paid subscribers surpass 20 million in the United States and Canada, the Los Gatos, Calif.-based company said Thursday.
The company, which delivers DVD and Blu-ray rentals by mail and streams videos online, saw its shares rise on Thursday, surpassing a previous high of $205.90 set on Nov. 30, 2010.
Netflix (Nasdaq: NFLX) signed on 7.7 million subscribers in 2010, and the company indicated that more than a third of the new subscribers signed up for its $7.99 streaming-only plan, which it created late last year. Analysts had questioned the impact of the streaming-only plan, but Netflix’s results indicate that the doubt was unfounded.
To put the company’s subscriber increase into perspective, Netflix gained more than twice the number of new customers in 2010 than in 2009, and the 3.08 million new customers it added in the fourth quarter of 2010 brought the total number of subscribers at the end of 2010 to just over 20 million, beating its own estimate of 19 million total subscribers in 2010 that the company made in October.
The company has tried to increase its online-only video database, and Reed Hastings, Netflix CEO, said that its library of streaming-only movies and television shows will steadily increase as it adds subscribers, which would help the company obtain new leverage in negotiating with film studios.
Netflix expects subscribers to grow to between 21.9 and 22.8 million by the end of the first quarter 2011. It currently faces competition from kiosk rental stations such as Redbox, online rental company Amazon.com, and video rental chain Blockbuster, which is currently undergoing Chapter 11 bankruptcy.
“We now expect NFLX to end 2011 with about 31.3 million subscribers (versus 27.3 million previously), as both the U.S. and Canada subscriber expectations for 1Q11 are higher than anticipated, with Canada much higher,” wrote Credit Suisse Equity Research in a research note after the company’s earnings release this week.
Michael Olson of Piper Jaffray maintained his “Overweight” rating on Netflix’s stock and raised his price target from $217 to $240.
Better Than Expected Canadian Expansion
Netflix last September expanded into Canada, and the company said that it expects to gain between 750,000 and 900,000 subscribers by the end of first quarter, which was more than what Credit Suisse analysts expected for all of 2011.
The company said that its expansion into Canada would post a loss in the early going, but the Canadian business is expected to reach profitability in the third quarter.
“Assuming that Canada continues to perform well for us, we will expand into an additional market in the second half of this year. Our estimate is that international operating losses for the second half of the year will be in the neighborhood of $50 million, but there is considerable variability to that number depending on how well we do in our second international market,” Hastings wrote in a letter to shareholders.
One obstacle facing the company’s expansion into Canada is the cap on download limits set by most Canadian Internet service providers (ISP), which could incur customers additional fees if they stream enough content from the Internet.
“It’s something we’re definitely worried about, [and] my sense is … many of them don’t understand their plan and it will take a billing cycle or two for them (to figure it out),” Hastings said on a conference call with analysts this week. “It is potentially a significant negative for Netflix.”
According to the company, streaming content could consume between 1 and 2 gigabytes of data per hour.
Currently, no such download caps are in place in the U.S. market.
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