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Netflix is popular and profitable again

Video streaming and rental service Netflix has finally climbed out of the shadow of last year’s price hike shadow, and returned to profitability. The company announced today its second quarter 2012 results, which shows that it generated $889 million during the quarter that ended in June. This awarded Netflix about $6 million in profits, and $0.11 per share for investors.

Despite this being on the high side of the company’s expectations for the quarter, its financial performance remains well below what it was last year. During the same period in 2011, Netflix generated $68 million in profit, on $1.26 per share.

The subscriber numbers were also lower than expected. Wall Street had hoped for 24.3 million U.S. streaming subscribers, 9.1 million DVD customers, and 3.7 million total international customers (which includes Canada, Latin America, and the UK). Instead, Netflix landed 23.9 million U.S. streaming subscribers, 9.2 million DVD subscribers, and 3.6 international customers. In other words, it came up about 300,000 people short of what investors were hoping.

And boy, do investors hate being wrong: Netflix dropped as much as 14 percent in after-hours trading.

Netflix appears to be counting 2011 as a lost year. While its fateful decision to boost the cost of bundling streaming and DVD delivery service by 60 percent came in July, and the failed attempt to relaunch its DVD business under the Qwikster name not long after, the company is just now getting back to 2010 levels of business. Still, subscriber additions remain at 50 percent of 2010’s Q2 level.

Netflix CEO Reed Hastings, while optimistic, writes in his investors letter (pdf) that the upcoming quarter is going to be a tough one for the company — thanks to the Olympics.

This quarter the Olympics are likely to have a negative impact on Netflix viewing and sign-ups,” he writes. “So, our Q3 guidance is 1 million to 1.8 million domestic net adds. If we finish Q3 in the high end of that range, we would remain on track for 7 million domestic net additions for the year; otherwise it would be challenging to achieve that goal by year end.”

Of course, none of this is really that important for the average Netflix customer. Though the company may still be struggling, it’s not likely to simply go under anytime soon. What really matters is content. And on that front, well, things look… OK.

“We continue pursuing innovative deals with others,” writes Hastings. “One such deal is an output arrangement with The Weinstein Company that will allow us to have an exclusive window for theatrical titles that will begin after the expiration of their first Pay window. This first-of a-kind deal will give Netflix members access to all Weinstein theatrical films in what had traditionally been the first Free TV window — just 12 months from the start of the Pay TV window, as opposed to the traditional holdback of nearly 8 years. Among the titles we will soon have are last year’s Academy Award winner, The King’s Speech and the highly acclaimed Blue Valentine. Next year we’ll get My Week with Marilyn and The Iron Lady.”

Hastings says that neither HuluPlus nor Amazon Instant Video have been able to “gain meaningful traction” against Netflix, and that Redbox Instant, which Verizon will soon launch, “will face a big challenge to break into the top 3 of subscription streaming services.” Hastings says that, while HBO Go is a popular competitor, “it is also possible that we will find opportunities to work together — just as we do with other networks.”

Cable and satellite networks, like Comcast, which offer their programming through mobile apps, remain the biggest threat to Netflix, says Hastings.

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