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Netflix Q2 Profit Surges 22%

23 Jul, 2009 By: Erik Gruenwedel

Underscoring rental’s ongoing renaissance Wall Street darling Netflix Inc. didn’t disappoint, posting second-quarter (ended June 30) earnings of $32.4 million, up 22% from earnings of $26.6 million during the previous year period.

The Los Gatos, Calif.-based online DVD rental pioneer ended the quarter with 10.6 million subscribers, up 26% from 8.4 million subscribers at the end of the second quarter last year. Subscriber growth included 289,000 net new members from gross additions of more than 1.9 million, which represented 40% year-over-year growth from 1.4 million gross subscriber additions during the same period last year.

Subscriber acquisition cost fell nearly 18% to a record low of $23.88 from $28.89, while the churn rate (non-renewing subscribers) increased to 4.5% from 4.2% last year.

More importantly, Netflix raised subscriber estimates through the year-end from a range of 11.6 million to 12 million members, up from previous projections of 11.2 million to 11.8 million.

Revenue for the quarter grew 21% to $408.5 million from $337.6 million last year.

Netflix expects to end the third quarter with total subscribers ranging from 10.9 million to 11.1 million, revenue from $416 million to $422 million and net income from $23 million to $28 million.

“We don’t seem to be affected by the recession,” Reed Hastings, co-founder and CEO of Netflix, said in an analyst call.

Hastings also apparently isn’t concerned with the news of the week that leading kiosk operator Redbox had agreed to guarantee Sony Pictures Home Entertainment $92 million annually over five years for new and select catalog DVD releases (no Blu-ray Disc). Hastings shrugged off estimates Netflix is losing about 5% of its subscribers to Redbox, characterizing the kiosk business as completely different from the DVD-by-mail/streaming business model.

“We don't see any material degradation in our growth,” Hastings said, alluding to Netflix subscribers in Salt Lake City and Houston, which he said represent Redbox’s strongest market penetration.

Indeed, Pali Capital analyst Stacey Widlitz said Redbox and others kiosks are targeting the most coveted rental subscriber: The infrequent user.

“We believe that the most likely customers to churn off of Netflix for Redbox are the more infrequent users, for whom $1 per day is more economically viable,” Widlitz wrote in a note. “These are Netflix’s highest margin customers.”

Hastings said he didn’t know more details of the Sony/Redbox deal other than what had been reported. However, perhaps cognizant of the impact increased license fees would have with studios, Hastings said Netflix would be happy to pay more for content (preferably streaming) provided the subscriber base could sustain it.

Hastings said Netflix spends half of its costs on postage and handling of DVDs, a percentage he would like to reduce and instead pay the studios more for better streaming content.

“We look forward to paying [studios] more money,” he said.

The CEO said the San Francisco Bay Area with 20.7% penetration (9.1% nationally) ranks as Netflix’s No.1 market and continues to grow 2% annually largely due to streaming.

“The San Francisco Bay area is a leading indicator of Internet behavior elsewhere in America,” Hastings said.

He said launching a standalone streaming business would be difficult due to the lack of comparable content available on DVD and Blu-ray.

“We may at some point test streaming only but don’t believe it will be particularly consequential,” Hastings said.



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