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Netflix First-Quarter Profit Jumps 44% on New Users

Reed Hastings, of NetFlix Inc.
Reed Hastings, president and chief executive officer of NetFlix Inc., speaks during an interview in San Francisco, on Feb. 17, 2009. Photographer: Ryan Anson/Bloomberg

April 21 (Bloomberg) -- Netflix Inc. said first-quarter profit rose 44 percent as the movie subscription service signed up new customers and increased online offerings.

Net income advanced to $32.3 million, or 59 cents a share, from $22.4 million, or 37 cents, a year earlier, the Los Gatos, California-based company said today in a statement. Sales rose 25 percent to $493.7 million, meeting the average estimate of 24 analysts surveyed by Bloomberg.

Netflix added 1.7 million subscribers in the quarter and expects to have as many as 17.3 million by year-end. Chief Executive Officer Reed Hastings is expanding digital offerings to encourage more users to stream movies and television shows through Web-enabled devices such as game consoles, Blu-ray players and Apple Inc.’s iPad. Netflix said 55 percent of its clients use the Web service, up from 48 percent last quarter.

“The combination of DVD by mail and watching instantly over Internet, and getting it on all the game consoles and other electronic devices for $9 a month -- that’s a really good value,” said Todd Greenwald, an analyst with Signal Hill Capital Group in Baltimore. He recommends holding the stock.

First-quarter profit topped analysts’ predictions of 54 cents a share, the average of 28 estimates in a survey.

Outlook

The company projects second-quarter earnings will rise to 62 cents to 73 cents a share on sales of as much as $525 million. Analysts surveyed by Bloomberg estimated profit of 72 cents on revenue of $516.4 million. Earnings for the full year will be $2.41 to $2.63 a share on sales of as much as $2.16 million. Analysts expected profit of $2.65.

Adding more movies and TV shows that people can view through the “Watch Instantly” online service will be central to Netflix’s long-term growth, Hastings said in an interview.

In the second half of the year, Netflix plans to cut spending on marketing and use the savings to buy more content rights. The shift may result in lower subscriber growth than in the first half of the year, Netflix said.

“If you think about when YouTube launched in 2005, and then we launched streaming in 2007 on laptops and PCs, to where we are today is amazing progress,” Hastings said. “If you’d asked us in 2005 would 50 percent of our active subscribers be streaming in five years, I would not have guessed it.”

The proposed elimination of Saturday service by the U.S. Postal Service would have a “pretty modest” impact on Netflix, Hastings said.

“We’re hopeful it wouldn’t begin until the middle of next year,” Hastings said.

‘Humming’

Netflix, which has gained 58 percent this year, rose $1.04 to $88.02 at 5:02 pm in extended trading after the results were announced. The shares fell 9 cents to $86.98 in regular Nasdaq Stock Market trading.

Churn, a measurement of canceled subscriptions, fell to 3.8 percent from 3.9 percent last quarter. Netflix is facing competition from Redbox movie rental vending machines operated by Coinstar Inc., as well as increased online movie offerings from Time Warner Inc.’s HBO, Comcast Corp. and DirecTV. Retailers such as Blockbuster Inc. and Movie Gallery Inc. are closing stores.

Hastings said the company also is watching to see whether Hulu decides to start a subscription streaming service.

“We’re taking that seriously,” he said.

Digital Offerings

As Netflix expands its digital offerings, Hastings has deemphasized new releases.

Netflix reached deals with Hollywood studios this year to delay rentals of new movies for 28 days. The arrangements with Time Warner’s Warner Bros., General Electric Co.’s Universal Studios and News Corp.’s Twentieth Century Fox give Netflix a discounted price for DVDs and additional streaming content. The studios also get a non-rental window to boost disc sales.

A Netflix subscription starting at $8.99 per month lets users rent one DVD at a time and provides unlimited access to the streaming service. The company doesn’t plan to start an online pay-per-view service, Hastings said.

“If we had offered a pay-per-view service for new releases, we would be in conflict with a broad range of companies, including Wal-Mart, Microsoft, Sony and Apple,” Hastings said. “By staying out of pay-per-view we avoid that channel conflict and are therefore able to get better distribution.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net.

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