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Netflix’s Q3 earnings rise 48%, stock falls

Fri, 10/23/2009 - 8:05am
Michael Liedtke, AP Technology Writer

SAN FRANCISCO (AP) – Netflix Inc. has been doing so well during the recession that it's getting tougher for the DVD-by-mail pioneer to live up to investors' lofty expectations.

Following a familiar script, Netflix on Thursday delivered third-quarter earnings and revenue that exceeded estimates as it added another 510,000 subscribers during its traditionally sluggish season.

What's more, management forecast that customer and earnings growth for the fourth quarter would be better than executives envisioned three months ago.

Netflix shares still plunged nearly 5 percent in extended trading Thursday.

"Our momentum is strong and growing," Reed Hastings, Netflix's chief executive, told analysts in a conference call.

In a show of confidence, Netflix predicted it will attract another 900,000 to 1.2 million subscribers in the fourth quarter.

If Netflix hits the top end of the target, it would represent the most subscribers the company has added in any three-month period in its history. Netflix ended September with 11.1 million customers.

The Los Gatos company is counting on another influx of new customers from an upcoming deal that may give more people an added incentive to subscribe to its service, which offers a package of DVD rentals delivered through the mail and video streamed over high-speed Internet connections.

Hastings told analysts the streaming feature will soon be available through a device that's already in many homes. He didn't provide specifics, but analysts have speculated Netflix may strike a deal to stream through video game consoles made by Sony or Nintendo.

The streaming has been available through Microsoft Corp.'s Xbox 360 since last year, and that option encouraged more people to sign up for one of Netflix's subscription plans.

Even with the anticipated growth, Netflix doesn't expect to earn as much money as it did in the third quarter.

That raised eyebrows because it implies Netflix's expenses must be rising, Signal Hill Group analyst Todd Greenwald said. In an interview, Hastings said the company plans to spend more on marketing and licensing fees on Internet streaming in the fourth quarter.

Netflix currently offers about 17,000 movies and TV episodes for streaming, but few of the videos are recent releases.

Despite that disadvantage, Internet streaming is being embraced by more Netflix customers, especially among those who have a gadget, such as the Xbox, that makes it possible to watch on a TV instead of a computer screen.

In the third quarter, 42 percent of Netflix's subscribers streamed at least 15 minutes of video. That was up from 22 percent at the same time last when Netflix had about 2.4 million fewer subscribers.

Most Netflix customers still prefer DVDs, which is the main reason Netflix expects its postal expenses to surpass $600 million next year and $700 million in 2011.

Netflix earned $30 million, or 52 cents per share, for the July-September period. That was up 48 percent from the same time a year ago.

Revenue climbed 24 percent to $423 million.

Netflix projected fourth-quarter earnings of 38 cents to 47 cents per share.

The company's shares fell $2.41 to $47.22 in extended trading. Before the release of results, its shares gained $1.78, or 3.7 percent, to close Thursday at $49.63.

The company's stock price has more than doubled in the past year, largely because Netflix's service has emerged as a popular attraction among consumers looking to save money by keeping themselves entertained at home during hard times. Netflix's most popular plans cost $9 to $17 per month.

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