Netflix Q3 profit jumps on sales, lower costs

Fourth-quarter forecast cut for the second time this month

By Danny King -- Video Business, 10/20/2008

OCT. 20 | Netflix today said its third-quarter profit jumped 30% as the No. 1 U.S. movie-rental service via mail cut subscriber-acquisition costs while boosting customers with its video-streaming service. The company also cut its fourth-quarter sales and subscriber forecasts for the second time this month as subscriber growth has slowed from a year ago.

Net income was $20.4 million, or 33¢ a share, up from $15.6 million, or 23¢, a year earlier, as sales rose 16% to $341.3 million and subscribers jumped 23% to 8.67 million, Netflix said in a statement today. The company was expected to earn 31¢ a share on $342.6 million in sales, the average analyst estimate in a Thomson Financial survey.

Netflix, which cut its fourth-quarter forecasts for sales and subscribers Oct. 6, reduced them again, as subscriber growth this month has been 30% slower than a year ago, Netflix CEO Reed Hastings said on a conference call today, adding that the company is "in the midst of challenging times." The sales forecast was cut today by $2 million to as much as $357 million, while the subscriber estimate was reduced by 100,000 to as many as 9.15 million.

Netflix has been trying to boost subscribers by augmenting its by-mail core with an expanded inventory of titles through its streaming service. Since last month, the company has signed agreements to carry video-streaming content from Liberty Media's Starz movie channel, Walt Disney's Disney Channel and CBS.

Last month, LG Electronics started selling a Blu-ray Disc player that instantly links up with Netflix’s 12,000-title streaming service. Hastings said today that the company would "announce more Blu-ray partnerships as they're ready for consumers."

Next month, Xbox Live customers will be given a free software upgrade to allow Netflix's video streaming service to be accessed through Xbox 360s, Hastings said today. In July, Netflix expaned its partnership with Microsoft to allow Xbox customers to stream Netflix movies to TV sets through connected Xbox 360 consoles.

In May, Netflix introduced a set-top box allowing customers to stream from an inventory of what was about 10% of its 100,000 titles. Later that month, Hastings said products such as Netflix Player by Roku, which had to be back-ordered within three weeks of its introduction, would double the company’s subscriber base within a decade.

Earlier this month, Netflix said it would raise subscriber rates by $1 a month for customers who want access to Blu-ray discs. The price hike, which Hastings expected to be enacted by about 500,000 subscribers by year end, will be a "small contributor" to fourth-quarter earnings, Hastings said.

Netflix, which began testing such pricing increases in August, also plans to make its video-streaming service available to owners of Apple's Macintosh personal computers by the end of the year.