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Netflix second-quarter profit nearly doubles

Netflix Inc.'s second-quarter profit nearly doubled as the online DVD rental pioneer continued to attract new subscribers despite stiffer competition from the much larger Blockbuster Inc.
/ Source: The Associated Press

Netflix Inc.'s second-quarter profit nearly doubled as the online DVD rental pioneer continued to attract new subscribers despite stiffer competition from the much larger Blockbuster Inc.

The Los Gatos-based company said Monday that it earned $5.7 million, or 9 cents per share, for the three months ended in June. That compared with net income of $2.9 million, or 4 cents per share, at the same time last year.

If not for accounting charges for stock options issued its employees, Netflix said it would have earned 14 cents per share. That trounced the mean estimate of 1 cent per share among analysts polled by Thomson Financial.

Revenue for the period totaled $164.5 million, a 37 percent increase from $119.7 million. The sales were just slightly above the average analyst estimate of $163.5 million.

Netflix announced its results after the stock market closed.

Emboldened by the second-quarter surprise, Netflix management predicted it will finish this year with a profit of $2.4 million to $11.9 million, a reversal from just three months ago when the company warned it might lose as much as $15 million with Blockbuster hot on its trail.

But Netflix didn't have to spend as much as executives anticipated to fend off Blockbuster in the second quarter, leaving the company in a much stronger position than almost everyone expected.

The performance underscored the continuing popularity of Netflix, which allows subscribers to keep up to three DVDs at a time for a $17.99 monthly fee. The concept, which depends on a combination of the Internet and mail delivery, has helped revolutionize the nation's entertainment habits. Some industry analysts have even linked Netflix's growth with declining attendance at movie theaters.

Netflix ended June with 3.2 million subscribers, a 53 percent increase from a year ago. Blockbuster's online rental service is believed to have between 750,000 and 1 million subscribers.

Wal-Mart Stores Inc., the world's largest retailer, provided the Netflix service with a major endorsement in May when it decided to hand over its online DVD rental business to its much smaller rival. Although Wal-Mart didn't have enough subscribers to provide Netflix with a significant financial lift, the publicity surrounding the move helped bring more attention to the service.

Netflix attracted another 178,000 subscribers between March and July, even as Blockbuster tried to overcome its late entry into rapidly growing online DVD rental industry by undercutting Netflix's prices by $3 per month.

Fewer subscribers are defecting once they sign up for Netflix, an indication that Blockbuster's push isn't hurting that much, if at all. Netflix's turnover rate fell to 4.7 percent in the second quarter, down from 5.7 percent a year ago.

"We are clearly winning the fight (with Blockbuster) on all fronts," Netflix Chief Executive Reed Hastings said during a Monday conference call.

Hastings predicted Netflix will continue to grow rapidly as the online DVD rental market swells to a projected 15 million subscribers by 2010.

While the company expects to continue making most of its money by mailing DVDs requested online, Netflix also is gearing up to introduce a service that will enable customers to download a handful of movie titles late this year. Netflix has earmarked 1 percent to 2 percent of its annual revenue for investments in the downloading service.

Netflix's recent success has been so heartening that the company has become less concerned about a possible challenge from online retail powerhouse Inc., which was believed to be mulling a possible entry into DVD rentals.

The Amazon threat "seems less formidable and less likely," Hastings told analysts.

Investors have been feeling better about Netflix, too. Even before Monday's strong earnings, Netflix's stock had climbed by nearly 40 percent so far this year.