Watch Out HBO, Netflix Is After You

Apr 21 2014, 4:30pm CDT | by

Tough nosed politician Frank Underwood, the lead character in hit Netflix series House Of Cards, will stop at nothing to get what he wants. If the video streaming powerhouse’s management is anything like their star HBO better watch out. In a letter to shareholders Monday Netflix CEO Reed Hastings and CFO David Wells were not shy about their ambition to overtake the reigning content king.

Hasting and Wells first pointed out that a Morgan Stanley report from March showed that 17% of consumers surveyed felt Netflix was the service that offered the best original programming, “second only to HBO.” Then the men concluded their seven page letter by saying, “We are approaching 50 million global members, but that is far short of HBO’s 130 million. We are eager to close the gap.”

Netflix’s first quarter earnings report shows that the company is on its way.

Netflix reported $1.1 billion in first quarter revenue, up 36% from the same period last year. Net income came in at $53 million, up from just $3 million a year ago and almost $2 million ahead of Wall Street analysts’ consensus estimate. Earnings per share were 86 cents, 4 cents ahead of the Street estimate.

As the company previously estimated, it finished the first quarter with 48 million subscribers, adding 2.3 million subscribers in the United Stated and 1.8 million in international markets.

Looking to the second quarter, the company expects revenue to come in at $1.13 billion, net income to be $69 million and earnings per share to come in at $1.12. By the end of the quarter Netflix anticipates having 49.8 million members.

Netflix shares initially turned to the red in after hours trading following the release, but the fan favorites’ fortune changed quickly and shares were up around 6.5% to $371 within 45 minutes of the release. In recent memory, however, Netflix has been a momentum name known to shoot up on not much news at all.

The stock gained 300% in 2013 but is down about 4% so far this year. Shares shot up 16% within seconds of its stronger than anticipated fourth quarter report in January, hitting the $450 range in mid March. By the end of that month the video streaming phenomenon had shed close to $100 in value amid a broad tech and momentum sell-off.

So there are at least two potential causes for the relatively muted investor response Monday.

First is that investors were simply expecting more. According to a report by broadband data company Procera, 16% of the Netflix subscribers on one U.S. cable provider watched at least one House Of Cards episode in the first 24 hours the hit show’s second season was live (Valentines Day). That’s eight times more people than watched when the first season launched a year earlier. This news led many to believe the 48 million was a conservative subscriber growth estimate.

“House of Cards, for which Season 2 debuted in February, attracted a huge audience that would make any cable or broadcast network happy,” wrote Hastings and Wells. “The on-demand nature of Netflix means that as we promote Season 2, we can still see significant new enjoyment of Season 1.”

The other reason is that Netflix announced plans to raise its prices. New members will pay either $8.99 or $9.99 per month for Netflix, while existing members will stay at the $7.99 rate that has been in effect since the company introduced streaming in 2010. The company expects to roll out the increase later this quarter. In its last earnings letter the company revealed it had been exploring a tiered pricing plan but said it was “in no rush to implement.”

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