By Lisa Richwine
(Reuters) - Netflix Inc surprised Wall Street on Wednesday with a quarterly profit after the video subscription service added nearly 4 million customers in the United States and abroad, sending its shares 35 percent higher in after-hours trading.
The dominant U.S. video rental and streaming company had warned three months ago a letter to investors that it was likely to see a loss for the October to December period, attributing it to startup costs for its expansion into Scandinavia.
But Netflix underestimated the impact of the busy holiday season, when sales of tablets, phones and Internet-connected TVs helped boost subscriptions even as the company faced competition from companies such as Hulu and Amazon.com Inc.
Netflix reported $8 million in net income for the fourth quarter, or 13 cents per share. Revenue rose 8 percent to $945 million from the same quarter a year earlier.
"We just saw tremendous growth over the holidays," Netflix CEO Reed Hastings said in an interview.
The company also forecast it will add 1.7 million members in the first three months of 2013, though it predicts net income will be "relatively flat" due to declining DVD profits and higher global operating costs.
Shares of the company surged 35 percent to $139.80 in after-hours trading. They closed at $103.26, up nearly 6 percent before its earnings announcement.
"They did surprisingly well with subscriber growth and profitability," Lazard Capital Markets analyst Barton Crockett said. "It was a very good quarter."
Wall Street analysts on average had expected Netflix to report a quarterly loss of 13 cents per share, according to Thomson Reuters I/B/E/S. A year ago, Netflix had earnings of $41 million, or 73 cents per share, on revenue of $876 million.
Activist investor Carl Icahn, who holds an almost 10 percent stake in Netflix and who has said that he felt the company was an attractive takeover target, has seen the value of his shares increase by $445.3 million to $768.9 million since he started buying them in September.
"We have no further news about his intentions, but have had constructive conversations with him about building a more valuable company," Hastings and CFO David Wells said in a quarterly letter to investors.
Netflix reported full-year net income of $17 million in 2012, a 92 percent decrease from a year earlier as the company's costs increased, on revenue of $3.6 billion.
SEEKING ORIGINAL CONTENT
Skeptics have questioned Netflix's ability to keep writing large checks to Hollywood TV and movie studios for the rights to their content. In addition to Amazon and Hulu, competitors also include Redbox Instant by Verizon, a joint venture between Coinstar Inc's Redbox and Verizon, plus video-on-demand offerings from cable TV providers.
But the Los Gatos-based company said it added 2.1 million customers during the fourth quarter to its U.S. streaming business, its largest segment, for a total of 27.2 million at the end of 2012. In international markets, the company signed up 1.8 million new customers.
Netflix said it expects more U.S. streaming growth in the first three months of 2013 compared with a year ago. The company next week will release the first 13 episodes of its political drama "House of Cards" starring Kevin Spacey, part of its push into exclusive original series that it hopes will bring in new customers.
"The fact that our growth remains this strong despite intensifying competition, and our already substantial U.S. market penetration, underlines the large opportunity ahead," the letter said.
In December, Netflix signed a deal for exclusive rights to new Walt Disney Co movies starting in 2016. Hastings said he would like to strike the same type of arrangement to stream movies from Sony Corp's movie studio, though he added that "there's no specific piece of content we must have."
With Sony, "our appetite's just like it was for Disney. It's strong. We're interested," he said.
The U.S. DVD-by-mail service, which Netflix is moving away from, shrunk by 380,000 customers in the fourth quarter to 8.2 million.
(Reporting by Lisa Richwine in Los Angeles and Sinead Carew in New York; Editing by Phil Berlowitz and Edwina Gibbs)
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