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Netflix Posts $43.5 Million Q2 Profit, Tops 15M Subs

21 Jul, 2010 By: Erik Gruenwedel

By-mail rental juggernaut Netflix continues to impress, reporting second quarter (ended June 30) net income of $43.5 million, up more than 32% from net income of $32.4 million during the previous-year period.

Los Gatos, Calif.-based Netflix added more than 1 million net subscribers (after subtracting non-renewals) in the quarter, bringing the base to more than 15 million members for the first time. The company expects its membership base to range from 17.7 million to 18.5 million subs by the end of the year.

“Consumers are clearly enthralled by our offering of unlimited movies and TV shows streamed over the Internet,” said Netflix co-founder and CEO Reed Hastings.

Indeed, the company said the percentage of subscribers who watch at least 15 minutes of streamed content per month increased to 61% in the quarter compared to 37% last year.

Netflix said 55% of subs streamed at least 15 minutes of content per month in the previous quarter.

In a call with analysts, management said new subscribers are electing to get the $8.99 monthly plan (one-disc-out-at-a-time), which includes unlimited streaming.

“If prices decline rapidly toward that one-out unlimited plan … it means that streaming is resonating with consumers and likely we are seeing accelerated growth,” said CFO Barry McCarthy.

He said the resultant lower revenue-per-user (RPU) is offset in part by higher prices charged to Blu-ray Disc subscribers, which McCarthy said continues to represent 10% of overall subs.

Hastings said DVD shipments continue to grow slowly, with no expectation they will flatten this year.

McCarthy said the gross-profit-per-paying-subscriber increased by about 30 cents year-over-year despite declining subscriber price points and slowing subscriber revenue.

Churn for the quarter was 4% compared to 4.5% last year. Churn represents free and paying subs who elect not to renew their monthly service during the quarter.

“The great news in this is that if churn stays low and DVD shipments grow slower than revenue, then that frees up a lot of money for marketing, content, and earnings if streaming is substituting for DVD,” Hastings said.

The CEO said the recent launch of subscription service Hulu Plus could become a significant competitor to Netflix. Hastings said the growing profile of the repurposed TV programming site co-owned by Disney, News Corp. and NBC Universal keeps management thinking about the evolving business model.

“We take it seriously as a direct competitor,” Hastings said, adding that he has no interest in bowing transactional VOD.

“We don’t know how to add any value to that space.”

The executive said Netflix continued to expand upon its recent content deal with Relativity Media to iron out streamed movie content agreements with Showtime, Epix and HBO. As far as TV content, Hastings said Netflix’s strategy to focus on catalog TV programs provides incremental revenue opportunities to content holders and increased access to content.

“We primarily focus on prior-season viewing,” Hastings said.

Overall revenue topped $519 million, up 27% year-over-year from more than $408 million in 2009, and 5% sequential growth from nearly $494 million in the first quarter.


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