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Netflix Quarterly Profit Jumps 34% on Subscriber Gain

Netflix Inc., the mail-order and online movie-rental service, said second-quarter profit rose 34 percent. The shares fell after sales missed analysts’ estimates and the company said it will spend for more exclusive content.

Net income advanced to $43.5 million, or 80 cents a share, from $32.4 million, or 54 cents, a year earlier, the Los Gatos, California-based company said today in a statement. Sales rose 27 percent to $519.8 million, missing the $525.4 million average of 22 analysts’ estimates compiled by Bloomberg.

Chief Executive Officer Reed Hastings said Netflix will pay more to get movies and television shows that can be delivered through the Web to game consoles, Blu-ray players and Apple Inc.’s iPad. The company, which offers DVDs by mail and is adding online content, said 61 percent of subscribers use its Web service, up from 55 percent in the first quarter.

“We can start to afford some major TV shows and movies on an exclusive basis,” Hastings said in a statement on the company’s website. Netflix plans “a mix of more-expensive exclusive content and lower-cost non-exclusive content.”

Second-quarter profit beat the 70-cent average of analysts’ estimates tracked by Bloomberg. The company projected third- quarter profit of as much as 74 cents a share on sales of as much as $554 million.

Shares Drop

Netflix fell $11.05, or 9.2 percent, to $108.60 in extended trading, after declining 74 cents to $119.65 at 4 p.m New York time in Nasdaq Stock Market trading. The shares have more than doubled this year as the company takes customers from traditional video-rental chains such as Blockbuster Inc., which is closing stores.

The combination of streaming and mail-order titles has helped the company reach 15 million subscribers at June 30, up 42 percent from a year earlier and 7.4 percent from the first quarter. Netflix raised its subscriber forecast to as many as 18.5 million by year-end, versus an April projection of 17.3 million.

Hastings is funneling cash into Netflix’s “Watch Instantly” service as competition heats up with Coinstar Inc.’s Redbox movie-rental vending machines and alternatives such as pay-per-view on cable. Netflix service starts at $8.99 a month for streaming and one DVD at a time. The company said this week that it plans a video-streaming service in Canada, its first foray outside the U.S.

“Netflix streaming is only going to be as good as the content they have,” said Ed Woo, an analyst at Wedbush Morgan Securities in Los Angeles. “They believe they have a significant competitive advantage, but they do not have enough that it’s not wreckable by everyone else trying to get into this space.”

Hulu Threat

Hulu Inc.’s new $9.99 a month Hulu Plus, which delivers mostly television programs, may “undermine future subscriber growth at Netflix,” George Askew, a Baltimore-based analyst at Stifel Nicolaus & Co., wrote in a July 13 research note.

Netflix said on July 6 that it plans to show films online owned by Relativity Media LLC. On July 15, Netflix expanded its agreement with Warner Bros. Home Entertainment to add television shows for streaming including “Nip/Tuck.”

“Distribution is becoming a commodity and you need content in order to differentiate,” said Tony Wible, an analyst at Janney Montgomery Scott in Philadelphia, who recommends selling Netflix stock. “Unfortunately for Netflix, there are many players seeking that same content, which will result in inflationary pressure.”

Earnings for the full year will be $2.58 to $2.86 a share, up from a previous projection of $2.41 to $2.63 a share, on an unchanged sales forecast of as much as $2.16 billion.

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

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