Netflix Q3 Results Beat Estimates; 5.7 Million Subs

Netflix released Q3 numbers today, and the results beat estimates.

Netflix ended the quarter with more than 5.7 million subscribers, a 58% year-over-year increase.

Revenue grew 48% to $256 million.

GAAP net income was $12.8 milion, a 24% increase.

Q3 gross margin was 38%.

Subscriber acquisition costs grew to $45.32.

Churn declined to 4.2%.

Forecast:

6.3 million subscribers by the end of Q4.

Q4 revenue of $273 - $278 million, and close to one billion dollars for 2006

Q4 GAAP net income of $7.5 million, and 2006 GAAP net income of $41 - $47 million.

2007 GAAP net income of $55 - $60 million.

Notes from the Q3 2006 earnings webcast:

Netflix spent a record $59 million in Q3 on marketing.

Netflix CEO Reed Hastings believes that Netflix will be minimally impacted by online DVD purchase sites such as Amazon and Apple.

Netflix will reveal download plans during the Q4 earnings webcast.

Hastings believes that a combined mail and online DVD rental offering will give them a huge competitive advantage.

With more than 8.3 million online DVD rental customers, 5% - 10% of video stores will close next year.

Adaptation of high-definition DVD is stalled due to the Microsoft / Sony war, and Hastings hopes that the studios will put an end to the war by announcing support for both formats.

14.9% of 2 million+ Bay Area households now subscribe to Netflix, and the rest of the country is following the 7 year-old Bay Area growth pattern.

Netflix spent $10 million on research and development of a movie download service this year, and expects to spend $40 million next year.

Netflix mailer ads are sold out for Q3 & Q4, but will remain less than 10% of revenue for the next year or two.

Hastings noted that there was very little change in the balance of revenue share agreements to DVD purchases.

Approximately one-third of Netflix rentals are new releases, and two-thirds are library titles.

Kiosks like Redbox are complimentary to Netflix since they only hold a limited number of titles, and also squeeze video stores.

Netflix does not get any special breaks from the post office for volume, only discounts for pre-sorting that are available to other companies. The discount for sorting can be as much as 7 cents.

Seeking Alpha has posted a transcript of the call.