Netflix Earnings Report Caught Wall Street Off Guard with Good News

NetFlix earnings quarterly report
NetFlix earnings quarterly report

Netflix (NFLX) saved the best for last.

Shares of the video service soared after Wednesday's market close, after it posted unexpectedly strong quarterly results and painted a promising picture of its near future.

The market has been skeptical of Netflix since its stock peaked at more than $300 two summers ago, but the shares have gone on to more than double since bottoming out five months ago.

Let's dive right into the reasons why the company is doing so much better than Wall Street was expecting.

1. Streaming Subscribers Keep Coming

Netflix closed out 2012 by adding 2.05 million domestic streaming customers and another 1.8 million international subscribers to its services in the final three months of the year.

Netflix's expansion into Scandinavia late last year helped generate its strongest international showing since it started offering its streaming service outside of the United States in 2010. However, Netflix also made its own luck by working aggressively with Latin American banks to offer debit payment solutions in a region that was initially slow to take to the platform.

Closer to home, tacking on more than 2 million net new Web-tethered streaming customers was an even bigger surprise. A popular knock on Netflix is that it's too easy to quit the $7.99 a month service. As consumers exhaust what they want to see -- and it's a lot easier to do that in streaming since they don't have to wait a couple of days in turnaround time to have a new DVD mailed out -- it's tempting to at least temporarily quit the service.

Netflix no longer reports its churn numbers, so we don't know how big a problem that actually is anymore. The bottom line is that Netflix is more than making up for that.

Netflix closed out the quarter with 33.27 million streaming accounts, a whopping 3.85 million more than it had just three months earlier.

2. DVD Customers Aren't Quitting the Way They Used To

Netflix has no reason to abandon its original business of sending DVDs and Blu-ray discs by mail. It's a high-margin business, and Netflix has the regional distribution centers in place to deliver quick rentals through most of the country. However, it is a fading business. DVDs are gradually becoming the new VHS tapes. Dish Network (DISH) announced this week that it would close 300 more Blockbuster video stores, and that's after shuttering thousands of locations over the past two years.

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Netflix isn't immune to movie buffs moving on from optical discs. It has been reporting lower DVD-based subscribers every passing quarter since it began reporting its streaming and DVD subscribers as two separate categories two summers ago.

"We expect DVD subscribers to decline steadily, every quarter, forever," CEO Reed Hastings told investors a year ago.

Over the past year alone, Netflix has seen its DVD subscribers shrink from 11.17 million to 8.22 million. However, it only suffered 380,000 net defections this past quarter. That's the lowest that the net cancellations metric has been since Netflix began reporting DVD as its own category.

3. The Current Quarter is Going to Be Even Better

If revenue climbing a better than expected 8 percent to $945 million and surprising analysts during the holiday quarter wasn't enough, the new quarter that began earlier this month should be even better.

Netflix may have 33.27 million streaming accounts worldwide as of the end of December, but it sees that number clocking in between 35.1 million and 36.5 million by the end of March. The video service's guidance also calls for a small profit on $1.004 billion to $1.031 billion in revenue.

Yes, this should be Netflix's first $1 billion quarter.

Wall Street pros were banking on yet another loss on just $969.4 million in revenue.
It's easy to get excited about Netflix's chances for subscriber retention in the near term. An onslaught of original programming is about to kick in, starting with Kevin Spacey in the David Fincher-directed "House of Cards" in February and the anxiously anticipated "Arrested Development" revival in May.

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Motley Fool contributor Rick Aristotle Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix.

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