Netflix posts strong subscriber growth, shares up

LOS ANGELES Thu Oct 21, 2010 1:53pm EDT

Netflix CEO Reed Hastings speaks during the unveiling of the iPhone 4 at the Apple Worldwide Developers Conference in San Francisco, California June 7, 2010. REUTERS/Robert Galbraith

Netflix CEO Reed Hastings speaks during the unveiling of the iPhone 4 at the Apple Worldwide Developers Conference in San Francisco, California June 7, 2010.

Credit: Reuters/Robert Galbraith

LOS ANGELES (Reuters) - High-flying Web video and DVD rental service Netflix Inc raised its customer forecast, but concerns abound over the rising costs it will have to pay studios for more movies and shows.

Shares were up more than 6 percent after Netflix said it added more customers than expected in the third quarter, owing to its online streaming service.

However, it has paid a big price to provide such offerings through recent partnerships with EPIX pay TV channel, estimated at $1 billion, and NBC Universal, a unit of General Electric Co.

The company reported earnings that were roughly in line with forecasts but analysts cited concerns about their momentum going forward.

"Right now is the best of all possible worlds for Netflix, being on so many devices and with video stores liquidating and consumer interest in video streaming escalating," said Barton Crockett, analyst with Lazard Capital Markets.

"They stand alone as the only meaningful video service, but the real question as you look ahead to next year is how do you top that when you consider all the big Internet companies who are stepping in competitively," said Crockett.

Netflix competes against companies like Hulu Plus, Coinstar Inc's Redbox, which is soon launching a streaming service, and Google. Amazon.com Inc has also weighed offering an online video subscription service.

RAISES Q4 FORECAST FOR SUBSCRIBERS

Netflix raised its fourth quarter forecast for subscribers and revenues, but left earnings guidance unchanged. It expects to end the quarter with 19 million to 19.7 million subscribers, up from its previous forecasted range of 17.7 million to 18.5 million.

It expects to generate between $586 million and $598 million in revenue, versus $580 million to $596 million, and left unchanged its earnings forecast of $32 million to $40 million, or 59 cents to 74 cents per diluted share.

Netflix posted third quarter net income of $38 million, or 70 cents per share, compared with $30.1 million, or 52 cents per share a year ago. Third quarter revenue rose 31 percent to $553.2 million. The results were roughly in line with earnings forecasts. Analysts on average had forecast earnings of 71 cents on revenue of $550.9 million, according to Thomson Reuters I/B/E/S.

Netflix ended the third quarter with 16.9 million subscribers. Shares had climbed 7.4 percent to $164.50 after closing at $153.15 on Nasdaq.

NO LONGER DVD COMPANY

The Los Gatos, California-based company started in the United States as a mail-in DVD service but Netflix now says the vast majority of its U.S. subscribers stream content on many devices through multitude consumer electronic partnerships.

"Three years ago we were a DVD-by-mail company that offered some streaming," said Netflix Chief Executive Officer Reed Hastings who said in the fourth quarter Netflix will spend more on streaming content than on DVD content.

"We are now a streaming company, which also offers DVD-by-mail," he said.

Last month, Apple Inc said it would add Netflix's streaming service to a new version of Apple TV, further cementing its dominance in the online movie rental business.

Epix is owned by Viacom Inc's Paramount Pictures, Metro-Goldwyn-Mayer Studios and Lions Gate Entertainment Corp.

Also last month, Netflix launched a streaming-only service in Canada, its first foray outside of the U.S., and has said it was considering offering a streaming-only plan in the U.S.

Netflix's clout was further underscored on Wednesday by a Sandvine report that found Netflix represents more than 20 percent of the downstream traffic in the U.S. in peak times and is heaviest between 8 p.m. and 10 p.m.

(Reporting by Susan Zeidler; Editing by Kenneth Li, Bernard Orr)

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