Netflix Q1 solid, competitive worries emerge

Netflix reported a first-quarter loss, but delivered financials that were better than expected. The company's subscriber tally has stabilized and Netflix projected "a much earlier return to global profitability."

The catch? Netflix spent a lot of time in its investor letter talking about competition from Hulu, Amazon Prime, and TV Everywhere efforts from the likes of Comcast. Shares fell 15 percent in afterhours trading. It didn't help that Netflix's marketing and content costs continue to creep higher.

The streaming media giant reported a loss of $5 million, or 8 cents a share, on revenue of $870 million. Wall Street was expecting a first quarter loss of 27 cents a share on revenue of $866 million.

For the second quarter, Netflix projected a second quarter loss of $6 million to a profit of $8 million. Wall Street was looking for a loss of 18 cents a share on revenue of $895 million.

CEO Reed Hastings and CFO David Wells said in a letter to shareholders:

Looking forward to Q2, sequential growth in domestic streaming contribution profit will offset the decline in DVD contribution profit from Q1, while improvements in profitability in each of the international markets will reduce the international losses by approximately $11 million (based on the midpoint of guidance). As a result, we are forecasting a much earlier return to global profitability than anticipated on a Q2 net income / (loss) range of ($6) to $8 million. The improvement in the outlook is a result of continued member growth (both domestically and internationally), as well as increased efficiency of our content and marketing spending.

Overall, Netflix's outlook was solid.

Hastings and Wells cited competition against Hulu and Amazon Prime, but saved their biggest gripes for Comcast.

As we've often said, we see the biggest long-term competition for viewing hours from MVPDs and cable networks through their TV Everywhere offerings. Consistent with this view, we began to see the consumer promise of TV Everywhere emerge in Q1, with all major networks and many MVPDs investing in their Internet applications and taking steps to evolve to Internet TV networks. Among recent developments, both HBO GO as well as Comcast's Xfinity application became available on the Xbox. Additionally, Comcast announced its Streampix streaming service available to current Comcast subscribers.

And then the gripes came:

Comcast caps its residential broadband customers at 250 gigabytes per month. On the Xbox, the Netflix app, the Hulu app, and the HBO GO app, are all subject to this cap. But Comcast has decided that its own Xfinity Xbox app is not subject to this 250 gigabyte cap. This is not neutral in any sense.

Among the key figures from Netflix:

• The company's current content library was valued at $1.15 billion as of March 31, up from $919.7 million on December 31.
• Content liabilities were $1.16 billion as of March 31, up from $935 million on December 31.
• Marketing expenses surged in the first quarter to $135.9 million. That tally is higher than the fourth quarter's $114.3 million mark and $104.3 million in the first quarter a year ago.
• International streaming subscribers hit 3 million with 1.2 million net additions. International revenue was $43 million.
• DVD subscribers fell to 10.1 million. Of those users, 7 million also get the streaming service.
• Netflix ended the quarter with $395.9 million in cash and equivalents, down from $508 million as of December 31.
• 2012 domestic net streaming adds will be about 7 million.
• Content spending will hurt margins going forward.
• The volume of exclusive titles will increase in the second quarter.