Netflix Stock Surges as Company Posts Unexpected Q4 Profit

Netflix added two million U.S. customers in the fourth quarter, bringing its overall base to 27 million

Last Updated: January 23, 2013 @ 2:35 PM

Netflix stock has climbed more than 30 percent in after hours trading on Wednesday after the company bested expectations with a strong fourth quarter financial performance.

Analysts suspected Netflix would post a net loss in the quarter because of international expansion. The company had even said in its third quarter earnings it expected international losses to peak in the fiscal year's final weeks.

Instead, Netflix posted $0.13 earnings per share and $945 million in revenue, both of which bested analyst expectations. Netflix added two million new subscribers in the United States, almost all of them paying, and another 1.8 million international customers. It now has 27 million subscribers in the United States and six million abroad.

Netflix's future growth has always depended on a steady increase in customers since it depends on those subscriptions for revenue. In a letter to shareholders, the company attributed the fourth quarter growth to its user interface and quality programming.

Wednesday's stock surge continued Netflix's recent rebound from several difficult months, some of that thanks to new deals with Warner Bros. Television and Disney. Netflix has been moving towards having more exclusive TV shows and movies on its service, so as to differentiate itself from rivals like Hulu and Amazon.

In its letter to shareholders, the company pushed back against criticism of its limited selection by noting how many more titles it made available for streaming than its competitor (see graphic).

The next test for the company begins Feb. 1, when "House of Cards," an ambitious and expensive original series from David Fincher, debuts on its streaming service.

Netflix CEO Reed Hastings and CFO David Wells did not mince words in their letter to shareholders.

"We believe that February 1st will be a defining moment in the development of Internet TV," they wrote.

If there is any reason for pause in reviewing Netflix's earnings report, it is that the gap between its earnings and available cash flow continues to widen. Netflix acknowledged that fact, attributing the negative cash flow to its significant investment in original shows.