Netflix tops Wall Street's expectations

/ Source: The Associated Press

Netflix Inc. continued to win over new fans in the first quarter, boosting the online DVD rental pioneer’s profit above analysts’ expectations and emboldening management to brighten its outlook for the rest of the year.

Shares of the Los Gatos, Calif.-based company surged more than 5 percent on the news.

Netflix said it earned $4.4 million, or 7 cents per share, during the three months ended in March. That contrasted with a loss of $8.8 million, or 17 cents per share, at the same time last year.

Boosted by an influx of nearly 700,000 new customers, Netflix’s revenue totaled $224.1 million, a 47 percent improvement from $152.4 million last year.

Netflix would have made even more money had it not been forced to adopt a new accounting rule that requires publicly held companies to deduct the cost of employee stock options from their profits. If not for that change, Netflix said it would have earned 10 cents per share.

The results surpassed the average estimate of 6 cents per share among analysts surveyed by Thomson Financial.

The company’s first-quarter revenue was $3 million above the average analyst estimate.

Heartened by the showing, Netflix predicted its sales this year will total at least $990 million, a $30 million, or a 3 percent increase, from its last projection three months ago. But management didn’t change its earlier earnings projections, reflecting plans to spend more money on advertising to attract more customers.

The company expects to end 2006 with at least 6.3 million subscribers, up from its earlier estimate of 5.9 million.

“We are measurably more confident than we have ever been,” Netflix CEO Reed Hastings told analysts during a Monday conference call. He predicted Netflix will increase its profit by at least 50 percent annually for the next few years.

Netflix released its first-quarter results and revised forecast after the stock market closed. The company’s shares gained 44 cents to finish at $31.24 on the Nasdaq Stock market, then added another $1.61, or 5.2 percent, in extended trading.

The results indicate that Netflix is widening its lead over its biggest rival, video store chain Blockbuster Inc., which has been investing heavily in its own online DVD rental service.

Blockbuster hopes to add another 800,000 customers to its online DVD service during the entire year, bringing its total subscribers to about 2 million before 2007. The Dallas-based company is expected to update the progress of its online DVD service on Thursday when it reports its first-quarter results.

Netflix now expects to attract 2.1 million more subscribers this year alone. The service picked up another 687,000 customers during the quarter to end March with 4.87 million subscribers — most of whom pay $17.99 per month to rent up to three DVDs at a time.

After they’re done with a movie, subscribers mail the DVDS back to Netflix in a postage-paid envelope and the company sends out another selection posted on an online wish list.

“We are reaching subscriber milestones much more quickly than any one anticipated,” said Hastings, who believes the company could have 20 million subscribers as early as 2010.

To protect its turf, Netflix hopes to shut down Blockbuster’s service with a recent lawsuit alleging its rival has illegally copied key parts of its patented system for distributing DVDs. Blockbuster has denied the allegations.

Netflix’s first-quarter growth indicated that the company hasn’t been hurt by recent news coverage of a class-action lawsuit that focused more attention on a practice that sometimes delays shipments of movies to frequent renters.

The system, derided as “throttling” by its critics, has provoked cries of outrage and indignation on the Internet.

But the protests apparently haven’t hurt Netflix, which has proposed settling the lawsuit by giving away free DVDs for a month to customers who joined its service before Jan. 15, 2005. Just 4.1 percent of Netflix’s customers canceled their subscriptions in the first quarter, down from 5 percent at the same time last year.