7 Things We Learned From Netflix's Quarterly Report

NetFlixNetflix (NFLX) investors are seeing red after Monday night's quarterly report.

The video service giant posted reasonable financial results for the first quarter, but the stock took a big hit on weaker-than-expected revenue guidance for the current quarter. Netflix sees its streaming and DVD businesses combine for $873 million to $895 million in revenue.

The pros were perched at $897 million.

The concerns for Netflix's model are certainly valid, but let's dive deeper into some of the news out of Netflix on Monday night.

1. Streaming Is Booming

Netflix is no longer providing monthly churn or quarterly gross additions, but it's offering up net subscriber data. Netflix saw its streaming subscriber count add nearly 3 million net subscribers, which means it has almost 3 million more new customers than cancellations for its streaming service.

Domestic streaming subscribers grew by 1.74 million to hit 23.41 million members. In its strongest international quarter since expanding outside of the United States, Netflix added 1.21 million international customers to close at 3.07 million international subscribers as of the end of last month. It added more net international accounts during the past three months than it did during the three previous quarters combined.

2. DVD Rentals Are Kabooming

It's no longer a surprise to see Netflix's disc-based subscribers shrink. When asked about its DVD business three months ago, CEO Reed Hastings told analysts to expect the number of members on disc-based rental plans to continue shrinking forever.

Netflix lost more than a million net DVD accounts during the period. It now has a little more than 10 million DVD-based subscribers, and 7 million of those also pay $7.99 a month more for streaming.

Disc rentals themselves aren't dead. Netflix may be shrinking and Blockbuster may be closing down stores, but Redbox parent Coinstar (CSTR) is posting healthy growth for its unmanned disc-spewing kiosks. However, Netflix isn't interested in actively pushing its DVD platform. It sees streaming as the future, and rightfully so.

3. Revenue Took a Step Back Sequentially

Revenue climbed 21% to $870 million over the past year, but it's not pretty when you compare last quarter's report to the $876 million in revenue it rang up during last year's fourth quarter.

Sequential weakness may seem to be an odd sight. If Netflix added nearly 3 million streaming accounts and shed just a little more than a million DVD customers, shouldn't revenue be inching higher quarter-over-quarter?

Well, the exact timing of when customers came and went, the fact that customers on streaming plans pay less than viewers on multi-disc plans, the migration of customers on DVD plans downgrading to cheaper plans, and the promotional nature of new accounts on trial deals all factored into the rare sequential slip.

Thankfully even the low end of Netflix's historically conservative guidance calls for revenue to climb during the current quarter.

4. Netflix Claims That It's Not Seeing Starz

One of Netflix's biggest deals for first-run content was a licensing deal that was not renewed by Starz when it expired in February.

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The Starz deal was important, largely because it included many of Disney's (DIS) newer video releases. Toy Story 3, Tangled, and Tron were just a few of the movies that went off the streaming service two months ago.

Investors have speculated that Netflix would take a subscriber hit after the Starz deal ran out, but Netflix claims to be holding up just fine.

"There was no discernible change in churn or viewing levels," reads Hastings' letter to shareholders last night. Netflix argues that viewing per member is at a record level, driven largely by the growing number of prior seasons of TV shows that folks are consuming in great quantity.

5. Netflix Isn't in a Rush to Return Money to Its Shareholders

For the second quarter in a row, Netflix avoided buying back stock.

Netflix had repurchased shares in five of the six previous quarters, a move that was criticized after the fact when the company was using its ample cash balance to buy its shares as they raced toward $300 last summer.

Investors shouldn't expect aggressive buybacks or the initiation of a dividend policy anytime soon. Netflix is pouring its money -- and it did manage to generate slightly positive free cash flow during the first quarter -- back into digital content.

6. Netflix Should Return to Profitability This Quarter

After posting a narrower-than-expected loss this past quarter, Netflix may be back in black as soon as the current quarter.
Netflix's guidance calls for a wide range, between a deficit of 10 cents a share and a profit of 14 cents a share, during the second quarter. At the midpoint of its outlook, that would be a small yet welcome profit after Netflix's first quarterly loss in years.

7. Netflix Is Back to Face the World

Netflix's domestic streaming business is profitable and its original disc-based model is even more profitable. The only reason that Netflix posted a loss during the first quarter is that it lost more overseas than it profited closer to home.

Netflix promised a few months ago that it would cease international expansion until it got its financial house back in order. Well, now that we're seeing things moving in that direction, Netflix is ready to introduce its service deeper into Europe later this year.

The market may not be entirely pleased with Netflix's report, but the company isn't turning back now.

Longtime Motley Fool contributor Rick Munarriz does own shares in Netflix and Disney. The Motley Fool owns shares of Disney. Motley Fool newsletter services have recommended buying shares of Netflix and Disney.

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