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Analysts Gush High Praise for Netflix

By : Erik Gruenwedel | Posted: 28 Jan 2010

Wall Street’s love affair with Netflix returned in spades (as if it ever left) the day after the Los Gatos, Calif.-based online DVD rental pioneer again reported stellar financial results.

Netflix Jan. 27 reported fourth-quarter (ended Dec. 31) net income of $30.9 million, up 36% from net income of $22.7 million during the prior-year period. It ended the quarter with nearly 12.3 million subscribers, which represented a 31% increase from a base of nearly 9.4 million subs a year ago, and a 10% sequential growth from the end of the third quarter.

“Excellent quarter across the board,” proclaimed Chicago-based William Blair & Co. digital media analyst Ralph Schackart, in a note to investors.

“Operating margin well above target,” said Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, who upgraded Netflix shares to “neutral,” from “underperform.”

“Increasing estimates well above consensus,” added Eric Wold, analyst with Merriman Curhan Ford in New York, who upgraded the stock’s rating to “buy” from “hold.”

Analysts collectively applauded Netflix’s ability to grow subscribers organically (versus third-party acquisitions) largely through its burgeoning streaming service, which they said keeps subscriber acquisition costs and membership attrition (churn) low or declining.

“In our view, Netflix is charting its own course in the digital market,” Schackart said, adding that the company appears to have a “suitable” business model that is not dependent upon new releases.

Indeed, CEO Reed Hastings said just 27% of rentals in December were new-release titles, which underscored management’s decision to strike a revised deal with Warner Home Video that delayed the studio’s new release shipments 28 days.

In addition Schackart said household penetration of Blu-ray players increased to 1.23 million homes in 2009, a statistic Netflix attributed to limiting average-revenue-per-user (ARPU) declines in the quarter 4% to $13.04. Gross profit per average paying customer nearly topped $5, the highest in two years, according to Hastings.

Analyst Wold said the relatively low price point of DVD/Blu-ray Disc rentals would keep packaged media “strong” for the next five to 10 years.

“The physical DVD model is not dying anytime soon,” Wold said.

Pachter agreed, saying Netflix appears to be doing a good job courting studios (with greater revenue sharing) rather than taking them to court.

“We think the recent Warner agreement reflects a likely trend,” Pachter said.

Related Stories :

Netflix Ups Q4 Profit 36%, Adds More Than 1 Million Subs
Netflix Eying Content From HBO, Showtime and Epix


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