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Netflix Defies Recession with 45% Quarterly Profit Surge

26 Jan, 2009 By: Erik Gruenwedel

DVD rentals appear to be a preferred entertainment diversion during the ongoing economic meltdown.

Netflix Jan. 26 reported fourth-quarter (ended Dec. 31, 2008) net income of $22.7 million, compared to income of $15.7 million during the prior-year period.

The Los Gatos, Calif.-based online DVD rental pioneer generated revenue of $359.6 million, up 19% from $302.4 million last year. The company accomplished this due to a 26% increase in monthly subscribers to more than 9.3 million.

Even better, Netflix said subscriber acquisition costs for the 718,000 new members was $26.67 per gross member, down nearly 23% from $34.58 during the same period last year.

Churn, the percentage of subscribers who do not renew their membership, increased incrementally to 4.2%, from 4.1% last year.

Netflix had nearly 7.5 million subscribers at the end of the fourth quarter in 2007.

Fiscal-2008 revenue topped $1.3 billion, up 13% from $1.2 billion in fiscal 2007.

The service said it expects to end first-quarter 2009 with 10.1 million to 10.3 million total subscribers and profit from $15 million to $20 million on revenue from $387 million to $393 million.

Netflix said it would end 2009 with nearly 11.3 subscribers and annual revenue from $1.58 billion to more than $1.6 billion. Profit would range from $88 million to $98 million.

Independent analyst Rob Enderle said the results underscore the strength of DVD subscriptions during a market downturn. He said consumers generally wouldn’t terminate a relatively inexpensive entertainment service unless their economic position becomes dire.

He said Netflix’s instant-streaming service safeguards the service for the future, in addition to being a value-add to subscribers.

“This shows that their move to embrace streaming was well-timed and that it is helping them weather this [recession] very well at first, and may actually allow them to go the distance,” Enderle said.  
He said that during market downturns, consumers typically rethink where they spend their entertainment dollars money.

“But folks will still want to watch movies and Netflix represents one of the best values for doing that,” Enderle said. “This market downturn may actually work for them long term; it really depends on how quickly streaming mainstreams.”

Edward Woo, research analyst with Wedbush Morgan Securities in Los Angeles, said the results represent a “strong positive” that Netflix is doing a superb job in the DVD-by-mail and streaming business.

“Their guidance indicates they believe their success will continue into 2009, despite the weak economy,” Woo said.


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