Netflix wrangles staying in line with revenue as it expands further into Europe

Even as Netflix (NASDAQ: NFLX) announced it was expanding to six more European countries in late 2014--Germany, Austria, Switzerland, France, Belgium and Luxembourg--its chief financial officer, David Wells, told investors that the online video provider would stay in line with or slightly behind its overall revenue while continuing to expand its reach and content offerings--and that Netflix's international operations would be profitable by the end of 2014.

David Wells, Netflix

Wells

"We have a good chance to do that on a consolidated basis," Wells said in response to a moderator question about its international profitability, during a presentation at the J.P. Morgan Technology, Media and Telecom Conference in Boston.

Part of that profit will be driven by Netflix's price increase for its standard streaming package. New subscribers will pay $1 more per month in the United States, £1 more in the UK, and €1 more in EU countries. Existing subscribers will not see a rate increase for two more years--except in Brazil, where current subs will be grandfathered into the increased price after just one year.

Wells said that Netflix would keep its spending in line with its revenues, and that it would likely split the additional revenue rolling in from the rate increase between investing in additional content--both licensed and original--and expanding its margin.

The gradual price increase along with a conservative attitude toward its spending, Wells said, gives Netflix "latitude to step back and look at … (the) next five years and what's significant" to its growth strategy.

Wells stayed coy on how much the provider plans to spend as it expands into Europe. "Over the next three weeks you'll get a confirmation," he said.

He added that worldwide, there are over 700 million broadband households in addressable markets. "What you're left with is Netflix is addressing a quarter to a third of that market," he said, noting that there are "plenty of expansion markets where we think Netflix will be a viable player."

Still, though Wells was keeping things on a positive note for investors, content acquisition appears to be more worrisome to Netflix than the company is letting on. In a new market, "(the) two biggest costs are content and marketing," Wells said. "Marketing tends to peak in that first quarter … you're building a market from scratch. Content depends on the characteristics of the individual territory."

While saying that Netflix has been able to compete in Europe and especially the UK market, locking in content deals may be a challenge. Wells stayed upbeat about the issue. "Maybe incumbent players are trying to lock up rights, but it's extremely difficult to try to suck up all the content oxygen out of the air."

"Our intent is to continue to expand content library," Wells told investors, noting that in order to address its target of 60 million to 90 million subscribers in the U.S. alone, Netflix will need more content. A key part of its strategy is "offering more exclusives and more curated offerings," he said. "There's still great content out there."

For more:
- Netflix has this press release
- listen to the webcast
- BTIG has this post (reg. req.)

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