OCT. 23 | Netflix reported a 48% rise in third-quarter revenue to $256 million, beating Wall Street estimates. Net income was up 85% to $12.8 million.
The company’s stock price soared more than 13% on the news in after-hours trading to more than $26 per share.
The number of subscribers to the online rental service rose 58% in the quarter to 5.7 million but at a steep cost. Subscriber acquisition cost was $45.32 in the quarter, compared with $36.33 for the same period of 2005.
Netflix added 493,000 net subscribers during the quarter, up from 396,000 in the third quarter of 2005. The company expects to have at least 6.3 million subscribers by year-end on its road to its goal of 20 million.
Subscriber churn rate for the third quarter was 4.2%, down from 4.3% in the same period last year. Netflix CEO Reed Hastings said the churn rate also was down from the 4.3% second-quarter rate, which he said was higher mainly because of seasonality. He expects the churn pattern to drop further in the fourth quarter, when “northern climates get cold and dark.”
For the first nine months of 2006, Netflix reported $34.2 million in net income on $719.4 million in revenue, vs. $3.8 million in net income on $489.2 million in revenue for the same period last year.
Hastings said the company’s continuing success is due largely to its reputation for fast shipping and its Web site, which includes such features as Friends social networking and other features that appeal to movie lovers and Internet users.
Hastings continued to stress that the company won’t reveal information on its plans for digital downloads until its conference call on results for the fourth quarter. However, he said he doesn’t expect Netflix to be much affected by download-to-own efforts because they are more closely related to DVD sales, rather than rental. “Our market is movie rental,” he said.
Netflix said it might spend up to $40 million on its digital download business next year and reiterated its belief that it will have an advantage in getting into the business because of its existing customer base. But Hastings warned of initial content availability constraints because of the studio window system.
Hastings said that overall, online rentals are continuing to take share from bricks-and-mortar stores, crediting Blockbuster for an expected 2 million customers at year-end. Added to Netflix’s planned 6.3 million total at that time, that will result in 8.3 million subscribers in the online rental universe.
Hastings said he believes as the online rental business grows larger next year, the store business will become even more difficult and the major chains will close 5% to 10% of their outlets.
Hastings referred to high-definition discs as an industry “dark cloud,” because studios haven’t agreed on a single format. The next generation is “trapped in the videogame boxing ring,” he said, because of the competition between Microsoft, which wants to make sure Sony’s PlayStation 3 doesn’t win over Microsoft’s Xbox 360, and vice versa.
Consequently, Hastings believes consumers will stay away from HD DVD and Blu-ray Disc. As he has said before, he believes the way to end the high-def format war would be for all studios to release titles in both formats, as two studios (Warner Home Video and Paramount Home Entertainment) already have done.
An area that is doing well for the company is advertising on its mailers. Although Netflix didn’t reveal figures, the company said it sold out advertising on its mailers for the third and fourth quarters.
Regarding competition from alternative business models such as kiosks, Netflix believes they are complementary because they focus on new releases and will further put the squeeze on video stores. About a third of Netflix’s rentals continue to be new releases, with two thirds catalog.
