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Netflix Still on the Rise

24 Jul, 2006 By: Jessica Wolf

Netflix.com clocked in the second quarter of the year with 5.2 million subscribers, and major jumps in year-over-year revenue and income.

That subscriber number is a 62% increase year-over-year, slightly (1%) down from the Los Gatos-based company's projections for the quarter.

Netflix's share price dropped more than 20% to $18.78 per share, from $23.76 the day after the company announced Q2 results.

Netflix underestimated churn for the quarter, which stood at 4.3%, said CEO Reed Hastings in a July 24 earnings call.

“We had thought we would be able to push it all the way to 63%, or 5.22 million subscribers by the end of Q2,” he said.

Churn was at expected levels through April, and then the company got hit with higher levels in May and June because of seasonality, he said. Churn was level in warm locales like San Diego and Los Angeles, but spiked in cities like Detroit, Chicago and Boston to 10% to 15%, and hit 20% in Minneapolis.

The online rentailer's net income for the second quarter of 2006 was $16.8 million, up nearly 200% from $5.7 million in the fourth quarter of last year, and up from $4.4 million in the first quarter of 2006.

Revenue stood at $239 million for the quarter, representing a 46% year-over-year growth from $164 million in the second quarter of 2005.

In the second quarter, the company brought in $2.8 million from sell-off of pre-viewed discs. That's compared to $500,000 for the same time frame last year, and $2.5 million in the first quarter of this year.

The company is still investing in developments for digital delivery of movies, and will unveil further information on that front after the end of the year.

New announcements about companies and content holders getting into digital delivery is creating the false impression that it's currently a viable competitor to traditional rental or sales of DVD, Hastings said.

“Movie downloading will evolve in the next decade, but it will do so slowly,” he said, pointing out that eight years after Napster and five years after Apple's launch of the iPod, nearly 90% of music sales still come from physical CDs. “DVD won't be dominant forever, but it will be dominant for a very very long time.”

Downloading services as they stand now, show no growth in actual traffic — “Nada,” Hastings said.

Nevertheless, Netflix will enter the fray, Hastings said.

“Movie downloading may be miniscule, but we intend to be the leader before it explodes,” he said.

Netflix also intends to be the leader in the overall rental market, Hastings said.

Hastings said he sees the $8 billion rental market evolving to a wholly online model, with Netflix in the lead and Blockbuster bringing up the rear.

Blockbuster is already promoting its Web service in stores, and will start to see store shutdowns as a result of the company transitioning its rental base to the Internet, Hastings predicted.

Meanwhile, Netflix has been able to pick up plenty of incremental users with low $5.99 price offerings the company began experimenting with earlier this year.

That price point appeals to someone who may never have become customer otherwise, he said. More often than not, however, while the low price might draw eyes to the service, most customers still opt for higher-priced fees and more unlimited rentals, he added.

Netflix is still on track to reach 20 million users by 2010-2012 and hit $30 million to $35 million in net income for 2006, Hastings said.

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