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Netflix Subscribers Grow 73 Percent in Q3

4 Oct, 2004 By: Erik Gruenwedel

Online rental service Netflix reported a leap in subscribers, confounding analyst warnings that its service would suffer from competition with upstart services from Blockbuster and Wal-Mart.

The company posted year-over-year subscriber growth of 73 percent, to 2.23 million members, for the third quarter ended Sept. 30.

The subscriber total, which represents a 6 percent increase from the second-quarter total of 2.09 million, fell within projections from Los Gatos, Calif.-based Netflix.

“I would take [those numbers] as a positive, given that Blockbuster became pretty aggressive during that period,” said Dennis McAlpine, analyst with McAlpine & Associates. “They have been meeting subscriber guidance and not getting much credit for it.”

McAlpine said the company, which must still disclose the new-subscriber acquisition costs, saw its share price free-fall 28 percent in the second quarter when officials said the cost of each new subscriber had increased from an anticipated $35 to between $37 and $39 each.

“That was the key negative in the last quarter,” McAlpine said. “If they report that the cost has reached $40 or more that will, to some extent, overshadow the number of new subscribers.”

Netflix expects net income of $17.5 million, far surpassing its previous forecast. The company reported subscribers had rented fewer movies than expected, lowering costs and increasing margins.

In an accounting change, Netflix said it would amortize catalog titles over three — not one — years as it does for new releases, which analysts said would also boost income.

“Because these assets have a longer productive life than we previously estimated, the company is earning a higher return on invested capital than we previously reported,” said Netflix CFO Barry McCarthy.

Netflix reported 8.1 percent household penetration in the San Francisco Bay Area (1.9 percent nationally) in the quarter.

The company, which last week announced a proposed movie download deal with TiVo, will report complete third-quarter financial results Oct. 14.

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