Netflix Profits Up, 5.2 Million Subscribers

Netflix posted Q2 2006 results and here's the rundown:

Revenue for the quarter was $239.4 million, 46% over last year and 7% over Q1 2006. It looks like Netflix is the next billion dollar company.

Netflix now has 5.169 million subscribers, and is forecasting 6.3 million subscribers by the end of 2006 (Netflix had several large bottles of champagne set aside for when they hit 5 million subscribers).

GAAP net income was $16.8 million, and the gross margin was 37.1% (up from 33.8% in Q1).

Subscriber acquisition costs (SAC) increased to $43.95, up from the usual $38-range. Netflix CFO Barry McCarthy said that they had warned ealier in the year that SAC could deviate 10% from $40. Netflix tries to maintain 50% earnings growth while spending every available penny on marketing, but in this case they couldn't spend the money fast enough.

Churn was 4.3%, up slightly from Q1 2006. Netflix attributes this increase to a seasonal exodus in colder regions.

Netflix is forecasting for the full-year 2006: at least 6.3 million subscribers, $980 million in revenue, and GAAP net income of $30 - $35 million.

During the webcast, Reed Hastings noted that they only grew subscribers 62% over last year, and they would have grown even faster except for an unusually high churn due to a seasonal effect in colder climates. Warmer regions experienced no increase in churn, but places like Detriot, Chicago and Boston had an increase of 10% - 15%, and Minneapolis had a 20% increase in churn. They were unable to notice this effect before due to weakened competition and the $2 price increase. Maybe Netflix should promote the ability to take a "Netflix vacation" more?

Hastings believes that Netflix is still on the early part of the growth curve. As an example, he noted that the Bay Area is still growing and 14% of households subscribe.

The $5.99 capped plan was "worthwhile," but most customers preferred the higher-priced plans.

Blockbuster is promoting the online service in stores, accelerating the growth of online rentals and speeding up the transition of the $8 billion DVD rental market to online services.

Hastings thinks that movie downloads are being overhyped -- there is no traffic growth at this point, no easy way to get movies to a TV, and the exclusive window limits content availability. He also noted that despite all the buzz about music downloads, 90% of music sales are still on CD. They believe DVD will dominate for a long time. He called it a "miniscule market," but they intend to lead before it starts to grow.

They repeatedly said that they will announce movie download plans during the Q4 webcast in January, but not before.

Hasting's family will be in Europe for schooling, but he will remain in the U.S. to run Netflix.

Barry McCarthy said that Q2 was the most profitable quarter in the history of the company.

Less than 5% of subscribers sign up for the $5.99 plan, but it is important to Netflix from a marketing standpoint.

The average selling price dropped $2 in the last 12 months, but the average revenue per paid disk shipment was slightly higher than Q2 last year.

McCarthy said that the mailer ads were sold out, and that additional revenue would come from "potentially an increase in pricing" or online advertising. However, he noted that the customer experience is important, and that they will limit the advertising to movie-related content.

A recording of the Netflix Q2 webcast has been posted on the Netflix Web site. In case you don't want to listen to the hour-long webcast, Seeking Alpha has posted a transcript of the call and the Q&A session.

It'll be interesting to see how Blockbuster did last quarter -- they will be posting Q2 results on Thursday, July 27th at 10am. Anyone can listen in at http://investor.blockbuster.com.

Comments

[fraygos]

I am curious, if they passed 5 million customers, did they open all those wine bottles then? wasn't that supposed to be a big thing??

[hrsd]

Stock tanked 20% after hours due to unfavourable outlook for the rest of the year. Also with rumors that apple and amazon will be offering movie downloads, its all bad news for nflx.