Netflix Q1 Results Soar

23 Apr, 2009 By: Erik Gruenwedel

Naysayers looking for a slip by Wall Street darling Netflix Inc. got no satisfaction as the by-mail DVD rental pioneer posted first-quarter (ended March 31) net income of $22.4 million, up more than 67% from net income of $13.3 million during the previous year period.

The Los Gatos, Calif.-based service added 920,000 net new subscribers (after subtracting non-renewals) in the quarter — the largest increase in Netflix’s 10-year history. Gross subscriber additions totaled more than 2.4 million, up 30% from 1.8 million additions during the previous year period.

Analysts contend, and Netlfix doesn’t deny, the service’s free Watch Now streaming service is a major catalyst in generating subscriber growth.

“First-quarter results showed strong momentum driven by consumer attraction to our unlimited rental proposition,” said Reed Hastings, co-founder and CEO of Netflix.

The executive said the company would continue to aggressively invest in streaming content this year despite the increased costs associated with licensing content twice — once for physical delivery and again for electronic.

“It is great for content owners and okay for Netflix,” Hastings said, alluding to the reduction in shipping and postage expenses with electronic distribution.

He said Netflix is “buried” with requests from consumer electronics manufacturers seeking to imbed the company streaming technology into media devices. Hastings downplayed the growth of streaming sites such as Hulu and YouTube and downloads from Amazon and iTunes, saying they all represent “drops” in an ocean of TV consumption.

“We all recognize that there will be some competition between us,” Hastings said. “For now we are so tiny relative to overall TV viewing.”

The CEO lamented that recently announced 20% to 25% surcharges for Blu-ray Disc rentals didn’t cover license premiums being imposed by some studios for BD content. He said the divergent fees for Blu-ray underscored a “diversity of opinion” between the parties on how to split costs.

“We are hoping to resolve those issues,” Hastings said. “Then we have an incentive to promote [Blu-ray].”

The executive said the rise in $1 new release DVD rentals offered by kiosks had become a predominant theme among subscribers opting out of Netflix. He said kiosks would be the service’s No. 1 competitor by the end of the year.

He said kiosks had a limited cannibalistic effect since new release titles represented just a third of Netflix’s business.

“The long-term effect of $1 new releases [however] is not positive for us or the industry,” Hastings said. “[Kiosks] can’t be good for the studio sellthrough business.”

Total subs topped 10.3 million, which represented a 25% year-over-year growth from 8.2 millions subscribers during the previous year period.

Subscriber acquisition costs topped $25.79 per gross sub, compared to $29.48 per sub last year. Churn equaled 4.2%, compared to 3.9% during the previous year period. Churn includes free and paying subscribers who decide not to renew monthly subscription service during the quarter.

Stacey Widlitz, analyst with Pali Capital, predicted churn would increase as subscribers cool to proportionally large slate of ‘B’-movie titles offered for streaming.

“This makes the streaming service a nice incremental offering but not good enough to stand on its own,” Widlitz said in a note. “Those that joined Netflix [just for] streaming might be disappointed.”

Indeed, Netflix shares fell more than 5% in after-hour trading April 23, the day of the financial announcement.

Revenue for the quarter was $394.1 million, up 21% from $326.2 million last year.