Netflix Speeds Global Expansion Despite ‘Significant’ Loss Projections

Netflix’s addition of 1.7 million streaming subscribers in Q1 was offset by a loss of 1.1 million DVD customers, the company said in its 10-Q filing Friday at the SEC. On March 31, Netflix reported 22 million paid streaming customers, up from 20.1 million at the end of December. Paid DVD subscribers fell from roughly 11 million to 9.9 million from Q4 to Q1, the company said. The company’s new subscriptions historically have been highest in the first and fourth quarters, it said, with the lowest net subscription adds coming in Q2. The ratio of streaming to disc subscriptions is in line with company projections that “the DVD portion of our domestic service will be a fading differentiator to our streaming success."

Total Netflix revenues dipped 0.7 percent from Q4 2011 to Q1 2012, due to a 13 percent fall in DVD subscriptions, which totaled $320 million, the company said. Domestic streaming revenue advanced 6.4 percent from the December quarter to $507 million, while international streaming revenues jumped 49 percent to $43 million, the company said.

Internationally, Netflix expects “significant contribution losses” in 2012 following the rollout of streaming services in September 2010 in Canada, Latin America in September 2011 and the U.K. and Ireland in January 2012. The rollout in Latin America was “harder than we originally thought” due to increased costs including subtitling, CEO Reed Hastings said in the company’s earnings call last week. The company said it plans to expand international operations to another market in Q4 but didn’t provide details. Netflix ended Q1 with 2.4 million paid international streaming subscribers, up from 378,000 at the end of 2011, it said.

Netflix’s total cost of revenue rose 42 percent to $624 million due to investments in existing and new streaming content, the company said. Content acquisition and licensing expenses increased by $234.6 million from Q1 2011, it said, primarily due to content for domestic subscribers and partially attributable to a rise in streaming content for international subscribers, Netflix said. Content delivery expense fell by $47.5 million year-over-year due to a 41.8 percent drop in the number of DVDs mailed, but that decrease was partially offset by an increase in costs associated with the company’s use of third-party delivery networks resulting from an increase in the total number of hours of streaming content viewed by subscribers, the company said.

Sequentially, Netflix’s cost of revenue rose 8.5 percent to $624 million from Q4 to Q1, the company said, this time on a $55.2 million spike in content acquisition and licensing expenses in its international business, and to a lesser extent domestic operations, it said. At the end of Q1, cost of revenue was 71 percent of total revenue, the company said.