Netflix Q4 surprise: profit up six-fold, over four million new subs

Michelle Clancy | 23-01-2014

Despite worries about stagnating subscriber growth in a saturated market, Netflix grew its fourth quarter 2013 net profit six-fold from a year ago, reaching $48 million, even as its subscriber base exceeded 44 million members worldwide.

The online streaming darling handily beat Wall Street expectations, gaining 2.3 million more US subscribers in Q4 and more than four million overall. Meanwhile, revenue was up 24% year-over-year to $1.18 billion.

In terms of Q1 2014 guidance, Netflix expects to add another 2.25 million domestic customers, setting up an about 11% year-over-year increase.

The one downside is that the total number of customers still using its DVD-by-mail service fell to 6.9 million from 8.2 million a year ago.

Netflix is well aware of the potential for running out of customer acquisition steam domestically; with 110 million total TV households in the US, it's rapidly approaching a 50% penetration rate, which is far more than any of its traditional pay-TV rivals. It is keeping momentum going by trialling new pricing models, which could replace the $7.99 standard streaming with a range of options that are priced according to usage levels.

An individual plan for $6.99 allows one stream at a time from an account; and a $9.99 subscription allows for up to three people to stream on one account at the same time. The $7.99 tier allows two streams at a time; and an $11.99 per month tier, introduced earlier this year, allows for four streams at one time.

The hope is that the new levels could help Netflix move more households to the higher tiers. And, the $6.99 plan could ostensibly recoup money from those who use other people's Netflix accounts for free. It could also tease non-Netflix users into giving the service a whirl where they may not have otherwise done so.

Netflix has a tough line to walk; in a recent RBC survey, 17% of Netflix customers said they would be 'very' or 'extremely' likely to dump their subscriptions in the event of even a 13% price hike, which would bring the subscription up from $7.99 for streaming-only to about $9 per month.

But offering a range of options could help the company boost its ARPU and aid margins without pushing consumers too far.

"Eventually, we hope to be able to offer new members a selection of three simple options to fit everyone's taste," CEO Reed Hastings said during the earnings call.

Shares of Netflix skyrocketed in after-hours trading, up 18% to $392.50.