Netflix 3rd quarter earnings dip, subs top forecast
Wed Oct 19, 2005 09:45 PM ET
By Gina Keating
LOS ANGELES, Oct 19 (Reuters) - Online DVD rental company Netflix Inc. (NFLX.O: Quote, Profile, Research) on Wednesday posted an acceleration in subscriber acquisitions in the third quarter but a spike in trial users spooked some investors, analysts said.
Shares fell nearly 6 percent in after hours trade after Netflix posted profits ahead of Wall Street targets and revenue just behind.
Avondale Partners analyst Frank Gristina said a drop in revenue per user, caused by a spike in non-paying trial users and growing popularity of cheaper subscription plans, may have concerned investors after a recent runup in Netflix stock.
Trial users get the service free for one month.
"The shares are priced for a great quarter and that (revenue) number didn't meet consensus," Gristina said. "Everything looks really solid from a fundamental standpoint," he added.
Netflix, which has been locked in an expensive battle for dominance of the online rental market with rival Blockbuster Inc.(BBI.N: Quote, Profile, Research) , has seen its share price rise 25 percent since Sept. 21 as Blockbuster subscriptions lagged.
Wedbush Morgan Securities analyst Michael Pachter, who has a "sell" rating on Netflix, said "a bigger issue is that they lose 500,000 (subscribers) a quarter ... and if it (cancellations) ever spikes up the stock price goes down."
Net income fell to $6.9 million, or 11 cents per share, from $18.9 million, or 29 cents per share a year earlier, but still topped analyst expectations of 7 cents per share.
Revenue rose to $174.3 million from $141.6 million. Wall Street had targeted $175 million, Reuters Estimates said.
Last month, Netflix cut its third-quarter forecast due to legal expenses. Costs of marketing and stock-based compensation also weighed on third quarter results.
Netflix said churn, or subscriber cancellations, declined to a record low of 4.3 percent compared to 5.6 percent for the third quarter of 2004.
Gristina calculated that average monthly revenue per user fell to $16.97 from $17.60 three months earlier and $21.66 a year earlier, before Netflix cut prices.
NOT BACKING OFF
Netflix Chief Executive Reed Hastings told analysts on a conference call on Wednesday that the company was postponing the launch of its movie download service, which was to have debuted next quarter, because of problems acquiring content.
Hastings also said the company would keep marketing spending fixed in coming quarters. Last year Netflix wanted flexibility to change marketing plans to battle Blockbuster.
"We aren't backing off. We'll continue to push the lever (on marketing spending) but we're doing it in a way that we can feel dependable" about earnings," he said.
Netflix's subscriber base grew by 61 percent, year over year, to 3.592 million in the third quarter.
The company said on Wednesday it expected to reach or exceed its previously stated goal of 4 million subscribers by year end -- forecasting 4 million to 4.2 million subscribers.
Los Gatos, California-based Netflix also raised its fourth-quarter net income estimate to between $4 million and $7.5 million from $1 million to $6 million, and its revenue estimates to between $191 million and $196 million from $187 million to $193 million.
For fiscal 2006, Netflix forecast pretax net income of $50 million to $60 million, revenue of at least $940 million and ending subscribers of at least 5.65 million.
CEO Reed Hastings said NFLX will postpone a test launch of its online movie download service indefinitely because of problems obtaining licensing agreements from Hollywood studios, Chief Executive Reed Hastings told analysts on a conference call on Wednesday.
Hastings said the company would continue enhancing its infrastructure and developing technology to deliver online movies so the service "will be ready to launch when the content climate begins to thaw."
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