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Netflix Reports Record Results

24 Apr, 2006 By: Jessica Wolf

Netflix boasted record results for the first quarter of 2006, and company executives hailed the success as a wave of the future for the industry.

The online rentailer April 24 announced a second-consecutive quarter of record-setting new subscriber additions (700,000), its second-lowest level of churn ever, 4.1%, as well as record-high earnings ($224.1 million).

Net income for the quarter was $4.4 million, compared to net loss of $8.8 million for first-quarter 2005. The site has now registered a total of 4.9 million subscribers, well on track to hit its goal of 20 million users by 2010-12, Netflix executives said.

“This was an excellent quarter in all the key areas of our business,” Netflix CEO Reed Hastings said in an earnings call with investors.

The company also retains its optimism that it will hit $30 million to $35 million in revenue this year and experience 50% year-over-year growth for the next several years.

The first quarter is typically a high-churn month due to free holiday trial offerings coming due, Reed said. But this year's first-quarter churn is the lowest for any start of the year in Netflix history.

Last week, the online rentailer sent out its first HD DVD discs to early adopter subscribers, Reed said. Netflix also will support the Blu-ray format when it comes to market in a soft launch next month.

Hastings reaffirmed Netflix's commitment to high-definition discs and implored Hollywood studios to support both formats with content, thereby removing any risk for consumers who chose one over the other.

“Since neither Sony nor Microsoft and Toshiba will concede nor win this format war for several years, there will be a protracted competition, which will hurt adoption of high-def formats,” Hastings said. “If all studios were to embrace both formats agnostically, consumers would be more comfortable making a format decision based on hardware pricing and features.”

It's not an ideal situation, of course, but studios already support a double-format system with VHS and DVD, he said.

“It's better than consumers delaying adoption while we wait for either Sony or Toshiba to blink,” Hastings said.

DVD sales are softening and high-definition is needed to keep consumer excitement high, Reed said.

But that's not to say consumers aren't interested in DVD at all any more, he said. Their attitude toward collecting it is simply changing, which is reflected by the growth of the online market this year.

Hastings likened the DVD market to the slowdown gaming platforms experience between new product launches, as users closely watch the high-def evolution, even if they don't own players yet.

“But DVD rental is unlikely to be affected by this hiccup in DVD collecting,” Hastings said.

Netflix estimates its closest online competitor, Blockbuster, signed up about 200,000 new subscribers for its online service in the first quarter, meaning nearly 900,000 renters shifted away from the store model and to online renting.

Netflix will follow through on its recent patent infringement lawsuit with Blockbuster for its online service, counting the costs required as worthwhile even though Blockbuster maintains Netflix doesn't have a case against the chain.

By the end of this year, Hastings said, Netflix will be ready to announce its firm timeframe to launch its download-to-own service.

There are still plenty of impediments in the market to this form of delivery, but Netflix is continuing to invest in technology and positioning itself to provide download offerings as its subscriber base continues to grow.

“We believe our ability to lead the future of digital downloads begins with making the subscription business even larger,” Hastings said.

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