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Netflix Profit, Subs and Revenue Soar

21 Apr, 2008 By: Erik Gruenwedel

Record new subscribers coupled with a six-year low on costs related to acquiring those subs resulted in Netflix Inc. posting positive first-quarter (ended March 31) results.

The Los Gatos, Calif.-based service reported net income of $13.4 million on revenue of $326 million, compared to income of $9.8 million and revenue of $305 million during the same period the previous year.

Household penetration reached 7%, up from 6.3% last year.

The results sent shares of the online DVD rental pioneer back up near last week's record levels to $39.32 in afternoon trading. Netflix stock hit a record $40.90 per share last week.

The online rental pioneer reported net subscriber additions of 764,000, with subscriber acquisition costs (SAC) at $29.50 and churn at 3.9%.

Churn is described as the number of subscriber cancellations divided by the number of subs at the beginning of the quarter plus gross additions, then divided by 90 days.

Netflix ended the quarter with 8.2 million subscribers.

CEO Reed Hastings said he doesn't expect second-quarter sub additions (about 160,000) to surpass the first quarter. He expects about 1.9 million new subs by the end of the year. The company projects 9.4 million subscribers by the end of 2008, an increase of 27% from 2007.

“All three [metrics] were record performances in six years as a public company,” Hastings said in a call with investors.

With the subscriber growth, Netflix plans to reduce marketing expenditures over the next three quarters, focusing instead on Instant Watch, its PC-based streaming service.

The service now has more than 9,000 movies and episodic TV selections.

Marketing spending increased $3 million in the quarter to $55 million, which was $17 million less compared to the same period in the previous year.

With the format war over and rentals of Blu-ray movies expected to increase as player prices drop, Hastings said the company would raise monthly fees for access to BD titles to offset the format's higher acquisition costs.

“Consumers are used to paying [a premium] for HD content in every other distribution channel, including video rental stores, VOD and cable,” Hastings said.

He expects Blu-ray rentals to remain in the single digits by the end of the year, with a slight fluctuation after Christmas following increased sales of Blu-ray players.

“As the price of Blu-ray players decline … become more widely adopted and economically important to studios, the DVD market is more likely than ever to remain enormous for many years,” Hastings said.

He said the company had teamed with three additional CE partners since the January announcement of a co-branded set-top box with LG Electronics. Co-branded devices are expected by the fourth quarter.

A separate partnership with an unnamed smaller CE player is expected to produce a consumer product earlier.

Hastings said successful implementation of movies to the TV from the Internet would require a multitude of partners beyond the companies currently involved.

“These partnerships have some implementation and execution risks as with all new technologies,” Hastings said. “We'll take it year-by-year and model-by-model.”

In response to a question regarding Blockbuster's proposed acquisition bid of Circuit City, Hastings said it was too early to comment. He did say Netflix would be willing to absorb Blockbuster's online subscribers if the company was exiting the market as Wal-Mart did a few years ago.

“If Blockbuster made such a decision we could probably work something out,” Hastings said. “[But] they've been in the business for a couple of years and they've got a big investment in their online model. I anticipate them to stay in the business for the foreseeable future.”

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