Netflix Puts Global Expansion On Hold As Costs Drag It Down

Netflix (NSDQ: NFLX) is on the road to profitability in Canada, but costs for its global roll-out are set to turn the company loss-making next year. So, after its next launches in the new year, Netflix will freeze international expansion.

“For a few quarters starting in Q1, we expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis,” the company told investors upon Monday’s Q3 earnings disclosure.

“After launching the UK and Ireland, we will pause on opening new international markets until we return to global profitability. We plan to do that by increasing our global streaming subscriber base faster than we increase our costs.”

The coming connected TV boom means an enticing global opportunity for Netflix – launching straight to TV, skipping DVD.

But, for some investors spooked by its recent indecision over its domestic model and by the loss of 805,000 U.S. customers, that opportunity may have presented at an inopportune moment. How can it return to profitability when its subscriber base is falling and international costs are pulling so hard?

Canada: Even the small profit Netflix has, 10 months after launch there, is due to turn negative again soon because it plans to double its content spend to match its U.S. outlay per capita. It is targeting consistent Canadian profit by Q3 2012.
Latin America: The company already had brand awareness in Canada, but rolling out to 43 countries in the region this year incurred big marketing outlay. “We are just beginning in this market with a lot to learn, and a lot we can improve over time, so it’s too early to tell whether we will reach run?rate break?even within two years as we would like,” the company says.
UK & Ireland: “While we normally target two years to profitability, with the increased competition in the UK relative to Canada, we anticipate it may take longer. We’ll know more after our first few quarters.”

Despite attracting a million Canadian subscribers, Netflix’s losses from international activities more than doubled to $23 million this Q3 alone after international marketing costs nearly doubled to $46 million.

Q4 losses from international are forecast to be far higher at $60 to $70 million, with slower revenue growth of $25 to $30 million from an estimated 1.6 to two million subscribers.

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