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Netflix Quarterly Revenue Jumps 77 Percent

15 Oct, 2003 By: Holly J. Wagner

Netflix's income for the third quarter was nearly triple the company's estimates, which pleased analysts.

Total revenue for the third quarter was $72.2 million, up 77 percent from the $40.7 million in revenue for the third quarter last year and up 14 percent from $63.2 million in the second quarter of this year.

The online rentailer finished the third quarter, which ended Sept. 30, with 1,291,000 total subscribers, up 13 percent from the second quarter. During the quarter, Netflix acquired 383,000 new trial subscribers, a 38 percent year-over-year increase from the 277,000 new trial subscribers acquired in the third quarter of 2002 and a sequential increase of 17 percent from the 327,000 new trial subscribers acquired in the second quarter of 2003.

Average monthly subscriber churn for the third quarter was 5.2 percent, down from 7.2 percent in the third quarter of 2002 and 5.6 percent in the second quarter of this year.

CEO Reed Hastings attributed the churn reduction to better service in the form of an upgrade that makes the Web site run faster for users and expansion of distribution centers that shorten delivery time to nearby customers. About 70 percent of subscribers receive “generally next-day delivery” and Hastings expects that to increase to 80 percent by year-end.

Lower cost of content, which CFO Barry McCarthy attributed to a shift away from revenue-sharing deals and toward outright purchase, boosted gross margin for the third quarter to 46.5 percent, up from 44.2 percent in the second quarter.

Disc usage per average paid subscriber increased slightly — about a third of a disc per month — during the quarter.Blockbuster is expected to roll out its Freedom Pass subscription model nationwide by the end of the year, Hastings said, but he's undaunted.

“Even when Blockbuster saturates the airwaves promoting their no-late-fee rental program, we continue to grow strongly. We believe this surprising result is because the Blockbuster brand is very tied in consumers' minds to late fees,” he said. “Repositioning the Blockbuster brand away from late fees is as difficult as repositioning a low-quality brand into a high-quality brand. Mere advertising will have little effect.”

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