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Netflix Ups Profit, Drops Subs

23 Jul, 2007 By: Erik Gruenwedel

Online DVD rental pioneer Netflix Inc. July 23 reported its first ever drop in subscribers, for the second quarter of fiscal 2007 (ended June 30).

The results, combined with revised downward revenue and profit forecasts and a separate announcement to cut $1 from two of its monthly subscription programs, sent Netflix shares tumbling down more than 12%, to $17.27 per share, at close.

The stock reportedly fell another 4.5% in extended trading.

Los Gatos, Calif.-based Netflix, which is in a protracted battle with Blockbuster Inc.'s Total Access for supremacy in Web-based movie rentals, saw a net decrease of 55,000 subscribers in the quarter. During the same period last year, Netflix reported a net subscriber gain of 303,000.

The service gained 481,000 net subscribers during the first quarter ended March 31.

Netflix reported more than 6.7 million total subscribers at the end of the quarter, a 30% increase from less than 5.2 million subscribers last year. The tally, however, represents a 1% decline from nearly 6.8 million subscribers at the end of the first quarter.

“We expect to return to positive sequential [subscriber] growth in the second half, even assuming no relief from the competitive environment due to higher seasonal growth in the second half of the year compared to the second quarter,” said Reed Hastings, CEO of Netflix, in a call with investors.

He said the ongoing battle with Blockbuster has helped grow the online DVD rental business “quite remarkably.” Hastings said total online subscribers increased 3.7 million subscribers over the past 12 months, compared to 2.5 million subscribers during the previous 12 months.

Hastings said projections to increase the total online DVD rental business by more than 4 million net subscribers in mid-2008 are strong.

“If online rental stays on the four million increase for three years, that would be more than 20 million net subscribers by mid-2010,” Hastings said. “Within the next few years, much of the DVD rental market would likely be online rentals.”

Buoyed by a $4.1 million patent litigation settlement against Blockbuster, Netflix posted income of $25.5 million compared to $17 million during the same period last year.

Revenue for the quarter totaled $303.7 million, a 27% increase from the same period last year.

Revenue dropped 1% compared to $305.3 million last year.

Separately, Netflix dropped the monthly prices on two rental plans by $1.

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