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Netflix growing again, barely beating fourth-quarter expectations

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Netflix Inc. is headed back up again.

The Los Gatos-based subscription video company on Wednesday reported better-than-expected earnings and a return to subscriber growth in the fourth quarter, beginning a promised turnaround after a dreadful third quarter, during which it lost subscribers and its stock price plummeted.

Investors were pleasantly surprised by the company's latest results, driving Netflix's stock up 13% in after-hours trading. Since the end of 2011, Netflix stock has been on an upswing, rising 37% to a closing price of $95.04 on Wednesday. That's still far below its high of $295.14 in July.

Net income was $41 million, down 13% from a year earlier. Revenue rose 47% to $876 million. Both were slightly higher than Wall Street analysts had expected.

Netflix added a total of 610,000 U.S. subscribers in the last three months of 2011, nearly making up for its loss of 800,000 in the third quarter. The company now has 24.4 million domestic customers, 21.67 million of whom pay $8 per month for Internet streaming and 11.17 million of whom pay $8 or more for DVDs by mail (some customers choose both options, but Netflix did not disclose how many "hybrid" users it has).

From July through September, Netflix reeled from the negative public response to a surprise price increase and aborted plan to separate its DVD-by-mail business into a separate brand called Qwikster. The effects of those missteps seemed to wane by December, when Netflix said it "returned to strongly positive net streaming additions," driven by fewer cancellations than expected.

The company still added 25% fewer subscribers than in the fourth quarter of 2010, when 2.7 million net new customers signed up. But in the current quarter, which will end March 31, Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells said they expect to match the company's performance in its streaming business during the same period last year by adding 1.7 million net subscribers.

Netflix expects to lose an additional 1.5 million DVD customers, however, after losing 2.76 million in the fourth quarter. The company also expects to continue seeing a migration of its customer base from DVDs-by-mail to digital streaming.

It added 380,000 customers in Canada and Latin America, where it operates streaming video businesses, bringing its total international customers to 1.86 million. In Latin America, where it launched in September, Netflix said it ended 2011 with about 500,000 subscribers. That's similar to the number it added in 2010 during its first four months in Canada, even though there are about four times as many households with broadband access in Latin America. Netflix attributed its problems there to a number of factors, including high piracy and low credit card usage online.

This month, Netflix launched its streaming service in Britain and Ireland. So far it is adding customers faster than during the first month in Canada, the company said.

In the current quarter, Netflix expects to report a net loss for the first time since 2005 because of its increased investments in content for its international services, particularly in Britain and Ireland. Hastings and Wells told investors the company will lose $9 million to $27 million on $842 million to $877 million in revenue.

Both are in line with analysts' expectations.

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-- Ben Fritz

Photo: Netflix's home page.

 
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