Netflix recorded its first loss in eight quarters, due to an ongoing decline in its high-margin, DVD rental business and its loss-making international streaming business.
Netflix recorded a loss of $5 million on revenue of $870 million. A year ago, Netflix reported a profit of $60 million on revenue of $719 million. The culprit appears to be its international business, where Netflix said it would woo new business with titles not offered to its U.S. customers.
Netflix also said it expects to return to global profitability next quarter, and to launch an additional European market by the fourth quarter.
As Netflix has indicated previously, the company is transitioning over to a streaming business. Total subscriptions for its DVD rental business have dwindled steadily, although Netflix lost fewer subscribers than previously. All told, 1.08 million subscribers terminated their DVD subscription accounts, and DVD revenue dipped from $370 million to $320 million sequentially.
At Netflix, however, the contribution to profit from its DVD rental business is disproportionate to the number of members. DVD rental contributed $146 million in profit.
Netflix said that its streaming business continues to expand, as the company added 1.87 million paid streaming subscriptions domestically, as well as 0.96 million streaming subscriptions among international customers. Looking ahead, however, sequential growth in domestic streaming contribution profit will offset the decline in DVD contribution profit from Q1, Netflix said.
However, international streaming appears to be the Netflix weak point, as it invests to help new markets get off the ground. Within the U.S., its streaming services generated a profit of $67 million. Internationally, Netflix lost $103 million on $43 million in revenue.
The culprit? Latin America.
"While there is limited current OTT streaming competition in the region (different from the UK), this lack of OTT competition means that the concept of on-demand streaming video (outside of piracy and YouTube) is nascent, requiring us to do more work in driving consumer understanding and acceptance of our streaming service," Netflix said in a letter to shareholders. "In addition, Latin America presents unique infrastructure challenges relative to our other markets; namely, low device penetration, under-developed Internet infrastructure and relatively low credit card usage as well as general consumer payment challenges for ecommerce."
"Our revenue and membership is growing in Latin America, and we are rapidly learning," Netflix added. "The odds of us building a large, profitable business in Latin America are very good, but it will take longer than we initially thought."
Additionally, Netflix said that the company had to spend more in subtitling costs in markets like Latin America.
In all, Netflix said that it expects its Canadian business to return a small profit, and for the losses experienced by its U.K., Ireland and Latin American businesses to diminish to a loss of $86 million and $98 million. Latin America, the UK and Ireland will take longer than 8 quarters to reach sustained profits, Netflix said.
Content to continue to grow
Netflix said that it expects to continue to spend more on streaming content, both in original series as well as licenses from major studios. For now, however, the company will spend less on content than it takes in on streaming revenue, to increase its margins.
What was once an experiment, however, is now a plan. "When we embarked on original programming, it was a strategic experiment," Netflix wrote. "We've gained enough confidence and perspective that we now view it as a strategic expansion. In particular, we are now treating it as a capability we should build, like international, to achieve our long-term ambitions. What is still uncertain is when or whether we will take it beyond 5 percent of our large content spend. We'll take it year by year, and see how good we can get at originals for our members."
Netflix said that its first high-profile series, "Lilyhammer," performs on par in terms of viewing hours to other premium content it licenses.
However, Netflix said it is wooing foreign customers with content it is not willing to license to domestic subscribers.
Netflix listed several films that are available to foreign customers that have not been currently available to U.S. customers, including the Showtime hit "Dexter," and the Pixar hit The Incredibles, both in Latin America. Netflix also said that it had licensed Thor, Transformers: Dark Side of the Moon, Kung-Fu Panda II, and Captain America to Canadian customers. U.K. customers will also receive the upcoming MGM film The Hobbit, The Woman in Black, and The Hunger Games.
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