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Netflix's second quarter profit nearly triples

Netflix Inc.’s second-quarter profit nearly tripled as the online DVD rental leader continued to lure thousands of new subscribers.
/ Source: The Associated Press

Netflix Inc.’s second-quarter profit nearly tripled as the online DVD rental leader continued to lure thousands of new subscribers, but the company’s shares plummeted 20 percent amid concerns about tougher competition.

The Los Gatos, Calif.-based company said Monday that it earned $16.8 million, or 24 cents per share, for the three months ended in June. That compared with net income of $5.7 million, or 9 cents per share, at the same time last year.

The results topped the average estimate of 18 cents per share among analysts surveyed by Thomson Financial.

Revenue for the period totaled $239.4 million, a 46 percent increase from last year’s comparable figure but slightly below analyst estimates.

Netflix ended June with 5.17 million subscribers after adding another 303,000 customers during the spring.

But Netflix had to boost its spending substantially to attract those customers and had a tougher time retainingo its existing subscribers.

Those factors could be offshoots of intensifying competition with much-larger Blockbuster Inc. — pressures that threaten to restrain Netflix’s earnings growth, much to the dismay of investors.

Once considered a kooky concept, Netflix won over so many converts that Blockbuster has invested more than $100 million to develop its own online service. Blockbuster ended March with 1.3 million online renters. The Dallas-based company is expected to update that figure Thursday when it’s scheduled to announce second-quarter earnings.

Most customers pay Netflix and Blockbuster $17.99 per month to rent up to three DVDs at a time. After they’re done with a movie, the customers return the DVDs in a postage-paid envelope and receive another selection posted on an online wish list.

Although Netflix gained the upper hand in this steadily growing market, investors have continued to fret that larger competitors eventually will topple the industry pioneer.

Determined to maintain its advantage, Netflix devoted $47 million to marketing during the second, a 74 percent increase from the same time last year. That translated into an average cost of $43.95 per new subscriber during the second quarter, up from an average of $38.13 last year.

In a Thursday conference call with industry analysts, Netflix Chief Executive Reed Hastings acknowledged Blockbuster’s more aggressive stance drove some of the company’s increased spending during the quarter.

As it courted new customers, Netflix lost about 50,000 more of its existing subscribers than management anticipated, Hastings said.

Most of the erosion occurred during May and June in colder cities like Chicago, Detroit, Boston and Minneapolis as warmer weather lured more people away from their televisions. Because the cancellation rate wasn’t as high in warmer cities like Atlanta, Los Angeles and San Diego, Hastings concluded the defections were driven primarily by a change in seasons than by people looking for a better deal from Blockbuster.

About 4.3 percent of Netflix’s customers canceled the service during the second quarter, up from a 4.1 percent during the first three months of the year.

Netflix is gearing up to spend even more heavily in the third quarter in hopes of further accelerating its subscriber growth, said Barry McCarthy, the company’s chief financial officer. Netflix aims to have 6.3 million subscribers by year’s end.

Although the increased spending will lessen the company’s earnings, Netflix still expects to hit its full-year profit target of $30 million to $35 million. Through the first half of the year, Netflix earned $21.2 million on revenue of $463.5 million.