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 34 percent higher.
The dominant U.S. video rental company had warned three months ago that it expected a loss for the October to December period as it paid startup costs for an aggressive expansion into Scandinavia and other foreign markets.
Netflix beat that guidance by reporting $8 million in net income for the fourth quarter, or 13 cents per share. Revenue rose to $945 million. The company also forecast it will add 1.7 million members in the first three months of 2013, though it forecasts net income to be "relatively flat" due to declining profit from the DVD business and higher global operating costs.
Shares of the company surged 34 percent after Netflix released its results, reaching $138.14 in after-hours trading, after closing at $103.26.
"They did surprisingly well with subscriber growth and profitability," Lazard Capital Markets analyst Barton Crockett said. "It was a very good quarter."
Netflix said it added 2.1 million customers during the 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 gained 1.8 million subscribers. The total Netflix subscriber base for Latin America, Canada and parts of Europe reached 6.1 million.
The holiday season was "particularly strong, driven by consumers buying new electronic devices, including tablets and smart TVs" that offer Netflix's service, CEO Reed Hastings and CFO David Wells said in a letter to investors.
The U.S. DVD-by-mail service, which Netflix is moving away from, shrunk by 380,000 customers to 8.2 million.
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.
Critics question Netflix's ability to keep writing large checks to Hollywood TV and movie studios while facing competitors such as Hulu, Amazon.com Inc, Redbox Instant by Verizon, a joint venture between Coinstar Inc's Redbox and Verizon, plus video-on-demand offerings from cable TV providers.
Netflix said it expected more U.S. streaming growth in the first three months of 2013 compared with a year ago. "The fact that our growth remains this strong despite intensifying competition, and our already substantial U.S. market penetration, underlines the large opportunity ahead," Hastings and Wells said in their letter.
In December, Netflix signed a deal for exclusive rights to Walt Disney Co movies starting in 2016.
The company also attracted interest from activist investor Carl Icahn, who bought nearly 10 percent of the company and said it appeared ripe for a takeover. "We have no further news about his intentions, but have had constructive conversations with him about building a more valuable company," Hastings and Wells said.
(Reporting by Lisa Richwine; Editing by Phil Berlowitz)