28 January 2010

Netflix Adds 1.1 Million Customers

USA Today

Netflix's fourth-quarter performance sparkled as its DVD-by-mail service surpassed 12 million subscribers, and management promised an even shinier sequel to kick off this year. Investors applauded, lifting the company's shares by more than 14% in after-hours trading Wednesday.

The results reflect the growing popularity of Netflix plans that bundle DVD rentals with unlimited video streaming over the Internet for as little as $9 per month.

Netflix (NFLX) added more than 1.1 million customers during the quarter — the most in any three-month period in its history. It took Netflix four years to attract its first 1 million subscribers after launching its rental service in 1999.

Management is expecting an even bigger first quarter. The company projects an additional 1.2 million to 1.5 million customers by the end of March. What's more, Netflix forecast financial results for the first quarter and the full year that exceeded analysts' current estimates.

Netflix shares soared $7.33 in extended trading after finishing Wednesday's regular session at $50.07, up $1.02.

The company earned $30.9 million, or 56 cents per share, in its latest quarter, a 36% increase from $22.7 million, or 38 cents per share, a year earlier. The performance topped the average estimate of 45 cents per share among analysts surveyed by Thomson Reuters.

Fourth-quarter revenue climbed 24% to $444.5 million, falling about $1 million below analyst forecasts.

That minor shortfall in revenue was overshadowed by Netflix's pledge to boost its profit margins to 11% from management's previous target of 10%. The adjustment will translate into additional earnings of 22 cents a share this year, estimated Wedbush Morgan Securities analyst Michael Pachter.

Netflix made the change because it feels more confident after its subscriber count rose 31%, or nearly 3 million customers, in 2009, said Barry McCarthy, the company's chief financial officer. Management expects to add another 3.2 million to 4 million subscribers this year.

The company, based in Los Gatos, Calif., got a big boost in the fourth quarter from Sony's PlayStation 3 video game console, which became an outlet for showing the company's roughly 17,000 streaming titles. The company already had a similar deal with Microsoft's Xbox 360 and in the spring will begin to link up with Nintendo's Wii console.

The streaming technology is being embraced by more Netflix subscribers as they wait for their DVDs to be delivered through the mail. About 48% of the customers streamed at least 15 minutes of Internet video in the fourth quarter, up from 28% in the prior year.

The widening appeal of Netflix's streaming option appears to be causing more people to sign up for rental plans that dole out one or two DVDs at a time. Those packages cost less than those that allow subscribers to rent three or more DVDs at a time.

The trend has lowered Netflix's average revenue per user to $13.04 in the fourth quarter, down 4% from an average of $13.58 per user in the same 2008 period.

Netflix nevertheless wants video streaming to become more prevalent because the company's postal expenses will fall as it mails out fewer DVDs to subscribers. Netflix estimates it will spend about $600 million on postage this year, with the annual cost rising to $800 million within the next few years.

By holding down its mailing expenses, Netflix hopes to be able to spend more money expanding its streaming library.

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