Netflix reports record $9.9 million Q1 earnings
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Doubled results meet bottom end of target as company revises down full year forecast
By Jennifer Netherby -- Video Business, 4/18/2007
APRIL 18 | Online DVD retailer Netflix saw its stock fall 8% Wednesday morning after the company reduced its subscriber and earnings outlook for the year, citing tough competition from Blockbuster Online.
For the first quarter, Netflix met the bottom end of its target, with earnings of $9.9 million, more than double earnings from the same period the previous year. Revenue was up 36% to $305.3 million.
Despite the record results, company execs called the results disappointing.
During a morning earnings conference call, the usually boastful CEO Reed Hastings acknowledged that Blockbuster’s Total Access program, which allows members to rent movies online and in stores, was allowing the company to significantly grow its share of the online rental business.
Blockbuster’s Total Access program has driven an explosion in online DVD rentals, growing the business from 6 million subscribers last year to 10 million today, Hastings said.
“Our thesis that online DVD rental would become very large appears more and more credible,” Hastings said. “Our thesis that more subscribers would choose Netflix seems more open to question, at least for now.”
Hastings predicted that Blockbuster isn’t making money on Total Access, which he said would force the company to eventually raise its prices, but he said he doesn’t think that will happen this year.
Netflix still has the bulk of online subscribers. It closed the first quarter with 6.8 million subscribers, growing its base 40% over the previous year. The company added 481,000 new subscribers during the quarter, less than the 687,000 subscribers it added the previous year.
But going forward, Netflix expects Blockbuster to be a drag on Netflix subscriber growth. Netflix said it expects to lose as many subscribers in the second quarter as it gains because of the tough competition.
Netflix cut its full-year subscriber outlook to 7.3 million to 7.8 million members by the end of 2007, down from an earlier target of 8 million to 8.4 million members. The company also revised its revenue outlook to $1.21 billion to $1.26 billion for the year, down from its previous target of $1.25 billion to $1.3 billion.
Netflix didn’t rule out cutting its own prices to drive subscribers.
But chief financial officer Barry McCarthy said the company is focused on profits and not driving subscribers, a shift in strategy from the last six months when it emphasized subscriber growth over earnings.
McCarthy said the reason is that it would lose money on those new subscribers. Instead, the company will wait for Blockbuster to raise prices, which Netflix believes will spur its own growth.
Subscriber acquisition costs were $47.46, up from $38.47 the previous first quarter.
Churn, the percent of customers leaving the service, was 4.4%, up from 4.1% in first-quarter 2006.
Netflix said its board of directors had approved a stock repurchase of up to $100 million by the end of the year.
The company is continuing to build its online rental streaming business, now offering 2,000 movies through its Watch Now service. Since launching in January, the company has delivered more than 1 million streams. (Read our review.)
By year-end, Netflix expects to offer 5,000 movies. Hastings said that by 2008, the retailer expects to have a way to deliver movie streams directly to the TV without a PC. He declined to say how the company will do that, beyond saying the company is working on a variety of partnerships.
On Monday, Netflix said it hired Replay TV founder Anthony Wood as its first VP of Internet TV.
Netflix was scheduled to report earnings Monday, but on Tuesday afternoon bumped it up to the following morning, without explanation.
