Netflix Q1 net up, gross profit margin down

LOS ANGELES Mon Apr 21, 2008 7:20pm EDT

LOS ANGELES (Reuters) - U.S. online DVD rental company Netflix Inc on Monday posted lower quarterly profit margins as it increased spending for online content.

Its shares fell 13 percent in after-hours trading.

The company's first quarter earnings were in line with consensus estimates, but many had expected Netflix to surpass those estimates.

"Expectations were really ramped up. People had expected Netflix to report beyond what it had forecast for subscribers and the gross margin was light," said JP Morgan analyst Barton Crockett.

Net income grew to $13.4 million, or 21 cents per share, from $9.9 million, or 14 cents per share, in the year-ago period. First quarter revenue rose 7 percent to $326.2 million from $305.3 million a year earlier.

Shares of Netflix have outperformed rival Blockbuster by a wide margin this year, contributing to high expectations from investors. Netflix stock had been up nearly 45 percent this year, while Blockbuster is down about 20 percent.

Netflix said it ended the first quarter with 8.24 million subscribers, representing 21 percent year-over-year growth from 6,797,000 total subscribers in the year-earlier period.

The gross profit margin for the first quarter was 31.7 percent, compared to 36.1 percent for the first quarter of 2007 and 33.8 percent for the fourth quarter of 2007.

On a conference call, Netflix officials said content costs have risen due to content rights investments for films delivered over the Web.

In an interview, Netflix Chief Executive Officer Reed Hastings would not disclose how much Netflix is spending in this area, but said it will continue to increase.

Netflix launched its Watch Instantly service last year, which allows its subscribers to watch movies online at no additional charge, with 2,000 titles. It now offers 9,000.

"We're investing heavily in online content to build awareness and it's fair to say that we're continuing to grow title count," he said.

Netflix officials on the call said they expect gross margins to remain steady for the calendar year with a slight uptick in the fourth quarter, despite the increased costs for Web-delivered films and a postage rate hike of two cents per round trip mailer beginning next month.

For the second quarter, Netflix forecast ending subscribers at 8.3 million to 8.5 million, with revenue of $334 million to $339 million. It said it expects net income of $21 million to $27 million with earnings per share of 33 cents to 42 cents.

It raised its full year subscriber forecast range, previously at 8.9 million to 9.5 million, now to 9.1 million to 9.7 million subscribers.

It also raised its revenue forecast, forecasting a range of $1.35 billion to $1.39 billion, up from $1.345 billion to $1.385 billion.

It's full year net income forecast was unchanged from an expected range of $75 million to $83 million.

But it lowered its earnings per share guidance range to $1.16 to $1.29 per share, from the previously forecasted range of $1.18 to $1.30 a share.

Analysts have deemed Blockbuster's recent bid for consumer electronics retailer Circuit City as a positive for Netflix on the premise that it would further reduce Blockbuster's focus on the online DVD mail-order sector.

Netflix has been benefiting in the past few quarters from reduced competition as Blockbuster, in an effort to turn itself around, has reduced spending on its costly rivalry with Netflix to instead focus on in-store DVD rentals.

Netflix shares fell to $34.24 in after-hours trade, after closing at $39.32 a share.

(Reporting by Sue Zeidler; editing by Carol Bishopric)

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