SAN JOSE, Calif. (AP) – Netflix Inc.'s first-quarter profit soared as more people signed up for its DVD-by-mail service than in any other three-month period in its history, an achievement apparently driven by consumers' desire for cheaper forms of entertainment during the recession.
But the performance didn't live up to the high hopes of investors, causing Netflix's recently high-flying stock to dive after the results were released Thursday.
The company added 920,000 customers during the first three months of the year, boosting its first-quarter profit 68 percent to $22.4 million, or 37 cents per share. That compares with $13.3 million, or 21 cents per share, at the same time last year.
Netflix ended March with 10.3 million subscribers, up from 9.4 million in December.
Revenue rose 21 percent to $394 million.
But Netflix didn't profit from the growth as much as Wall Street anticipated, partly because the company has been spending more money to expand and improve a complementary service that streams movies over high-speed Internet connections.
Analysts, on average, had expected Netflix to earn 41 cents per share on revenue of $390 million, according to Thomson Reuters.
Netflix shares fell $2.20, or nearly 5 percent, in Thursday's extended trading after finishing the regular session at $45.32, down 56 cents. Based on that closing price, Netflix’s stock price had risen more than 50 percent this year.
The rapid run-up in Netflix's market value has coincided with the increasing popularity of its service, which accepts rental requests online and then sends out DVDs through the mail. New selections are sent after customers return a disc in a postage-paid envelope.
Most subscribers pay to rent one to three DVDs at a time. The cost of those plans range from $9 to $17 per month – a price that has emerged as a relative bargain as the recession has prompted more people to stay at home to save money.
Since the end of September, Netflix has added 1.6 million subscribers.
"We are very fortunate to be growing like this right now," Netflix CEO Reed Hastings said in a Thursday interview. "It's not because we have done anything particularly brilliant. It's just because our service is a great value."
Netflix is now hoping that consumers don't become even more frugal and seek to lower their DVD rental bills even further. Recently, a growing number of people are canceling their Netflix service and renting DVDs from store kiosks that charge as little as $1 per disc for new releases, Hastings said.
"By the end of the year, kiosks will likely be our number one competitor as video stores fall inversely," Hastings told analysts during a Thursday conference call.
Management expects Netflix's growth to slow in the second quarter – traditionally a sluggish period as more people go on vacation and spend more time outside.
Netflix forecasts that it will end June with 10.4 million to 10.6 million subscribers. It expects to produce earnings of 44 cents to 53 cents per share on revenue of $403 million to $409 million. Analysts, on average, had projected earnings of 47 cents per share on revenue of nearly $408 million.
Hastings is counting on Netflix's Internet streaming service to help retain and attract customers, even as DVD rental kiosks do brisker business. The streaming option has widened Netflix's appeal by giving customers a chance to watch more movies and TV shows while they are waiting for another DVD to arrive in the mail.
But the streaming service is squeezing Netflix's profits because the company doesn't charge anything extra for it, even though it costs more to support the technology and license the rights to about 12,000 video selections.
Netflix is also facing higher expenses to meet its customers' growing demand for Blu-ray DVDs. The company plans to offset some of those costs, starting Monday, by raising the surcharge on Blu-ray rentals by $2 to $4 per month on its most popular subscription plans.
A two-cent increase for postage beginning next month also will raise Netflix's expenses.
Netflix nevertheless brightened its outlook for the rest of the year. The company now expects to end 2009 with as many as 11.8 million subscribers, 500,000 more than it forecast in January. Full-year profit is expected to range from $1.56 to $1.72 per share on revenue, up from earlier guidance of $1.43 to $1.59 per share.