UPDATE 3-Netflix profit beats Street view; shares jump
(Recasts, adds CEO comments, analyst)
By Sue Zeidler
LOS ANGELES, July 25 (Reuters) - Netflix Inc (NFLX.O) shares rose on Friday as the by-mail DVD company's better- than-expected second-quarter profit and raised 2008 forecast eased the concerns of analysts about higher costs related to its expansion into providing streamed content.
Netflix also said gross margins will rise slightly even as it spends more for Web-delivered content and it expects to soon start testing price increases for Blu-Ray rentals.
"Our goal is to materially increase subscribers and earnings per share every year as we expand into streaming and this quarter we continued to make excellent progress toward that goal," Chief Executive Reed Hastings said on a conference call with analysts.
Netflix, which competes primarily with Blockbuster Inc (BBI.N), but also faces challenges from online video providers such as Apple Inc (AAPL.O) and Amazon.com Inc (AMZN.O), said second-quarter net income grew to $26.6 million, or 42 cents per share, from $25.6 million, or 37 cents a year earlier.
Excluding special items, profit was 45 cents a share, beating analysts' average forecast by 4 cents, according to Reuters Estimates. Revenue rose 11 percent to $337.6 million.
On the call, Hastings said Netflix did not plan to enter the pay-per-view segments where Apple, Amazon and others focus, but will continue focusing on integrating its streaming software into Blu-Ray players, game consoles, DVD players and stand-alone Web devices.
After months of speculation, Netflix announced a deal this month to let subscribers watch streamed movies and TV shows on Microsoft Corp (MSFT.O) Xbox 360 game consoles this fall. The Microsoft tie-up followed two other deals with set top box makers -- Roku and LG Electronics Inc (066570.KS) -- in its quest to bring streamed content to the television.
Microsoft has sold more than 10 million Xbox consoles and analysts estimate nearly 1 million Netflix subscribers own X-box 360s. Hastings on Friday said it was too soon to know how much the Microsoft deal will drive additional subscriptions.
He said another partnership will be announced this year. Netflix said it added a net 168,000 subscribers in the quarter, 25 percent more than in the year-earlier period. It ended the quarter with 8.4 million subscribers.
It still expects to end the year with 9.1 million to 9.7 million subscribers. Netflix raised its earnings forecast for the year to a range of $1.19 to $1.31 per share, compared with a previous range of $1.16 to $1.29.
It narrowed its 2008 revenue forecast to a $1.36 billion to $1.38 billion range from $1.35 billion to $1.39 billion.
The average full-year analysts' forecast is $1.30 a share on revenue of $1.37 billion.
Netflix expects third-quarter and fourth-quarter gross margins to be up slightly, despite growing investments for Web-delivered content, allaying some analysts' concerns.
"Some people were thinking that gross margins might deteriorate as online streaming costs increased, but that didn't happen," said Barton Crockett, an analyst with JP Morgan, which has an investment banking relationship with Netflix.
Analysts said Netflix seemed to be establishing itself in the nascent Web-to-TV market, relative to competitors.
"The transition to digital will likely take about five to 10 years. They seem to understand better than most companies that price point and ease of use matter tremendously to mainstream consumers," said Derek Brown, analyst with Cantor Fitzgerald.
In an interview, Hastings elaborated on the Blu-Ray test pricing.
"Blu-Ray discs costs about 25 percent more (than standard DVDs) and it necessitates us doing a modest pricing premium for those who want to rent Blu-Ray DVDs," he said.
After rising about 7.5 percent earlier, Netflix shares rose 76 cents, or 2.73 percent, to $27.49 in midday trading on the Nasdaq. (Reporting by Sue Zeidler; additional reporting by Franklin Paul in New York; editing by John Wallace and Andre Grenon)
