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Netflix Reports Net Income Growth

23 Oct, 2006 By: Jessica Wolf

Netflix once again outpaced expectations, with year-over-year net income, revenue and subscriber gains, which will help put the online rental company on the map for digital downloads.

Netflix Monday announced 84% year-over-year net income growth to $12.8 million in the third quarter and a 58% increase in subscribers to 5.7 million. Quarterly revenue was up 48% from last year to $256 million. Churn was 4.2%, compared to 4.3% for both Q3 2005 and Q2 of 2006.

CEO Reed Hastings and CFO Barry McCarthy promised Monday that they will release full details on Netflix's planned expansion into digital downloads during its fourth quarter/full 2006 earnings call in January 2007.

By the end of 2006, Netflix will have spent slightly less than $10 million on digital downloading initiatives. Next year, that number will be closer to $40 million, Hastings and McCarthy said.

The key competitive advantage for Netflix's future in the digital downloading market is building up its subscriber base, Hastings said.

Netflix will have to gather a net addition of 700,000 subscribers in the fourth quarter to hit the company's previously stated goal of wrapping up the year with 6.3 million subscribers. Net additions for the third quarter stood at 493,000.

Still, company executives said the goal of 20 million subscribers by 2012 is still on track. Netflix already has surpassed its oft-repeated goal of $35 million in net income for 2006.

The company spent more on marketing in the third quarter of 2006. Subscriber acquisition cost for the quarter was $45.32 per gross subscriber addition, compared to $36.33 for the same period of 2005, and $43.95 in the second quarter.

Netflix has experimented over the past year with several cheaper pricing programs. Still, the priciest, three-DVD per month option remains the most popular, Hastings said.

Meanwhile, the third quarter saw ramp-ups of releases in both the HD DVD and Blu-ray Disc formats, player adoption is still far too “microscopic” to factor next-generation discs into results or projections for the company, Hastings said.

There are only somewhere between 10,000 and 30,000 players for both formats combined in the market, Hastings said.

"The market is reasonably frozen pending the arrival [of PlayStation3]," he said.

Hastings reiterated past statements that Netflix as a company would like to see the much vaunted format war cease to exist by all studios simply pledging support for both HD DVD and Blu-ray.

"Then consumer adoption would begin in earnest," he said.

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