Netflix profit up but growth targets lag

A DVD rental from Netflix is seen with the company's website in Medford, Massachusetts July 25, 2008.

LOS ANGELES (Reuters) - Netflix Inc (NFLX.O), the top U.S. online DVD rental company, posted a strong profit, but cited growing competition from DVD rental kiosks and provided guidance that disappointed some analysts.

Netflix, which has grown at a torrid pace over the past two years to crowd out rental chains like Blockbuster (BBI.N), now expects to end 2009 with 11.2 million to 11.8 million subscribers, up from a previous target of 10.6 million to 11.3 million.

"They're doing everything right, but the stock was priced for perfection and guidance wasn't raised by as much as the whisperers were hoping for," said Michael Pachter, an analyst at Wedbush Morgan Securities.

Netflix raised its earnings per share forecast for the year to a range of $1.56 to $1.72, from $1.43 to $1.59, but the stock fell 6 percent to $42.50 after-hours.

On a call with analysts, Netflix Chief Executive Officer Reed Hastings said in terms of competition, the rise of stand-alone kiosks that offer $1 DVD rentals was notable.

"In exit surveys of canceling Netflix subscribers, kiosk is more and more frequently named as where they will go now for movies," he said. "By the end of the year, kiosks will likely be our number one competitor as video stores fall inversely," he said, adding the "long-term effects of ubiquitous $1 new release DVD rental are not positive for us or the industry as a whole."

When asked in an interview, what Netflix could do regarding the kiosks, Hastings said: "We have to focus on our differentiators, such as selection, convenience and the value of unlimited streaming. We'll focus on our benefits and they'll focus on theirs," he said.

Hollywood studios have long disliked kiosks such as the more than 12,000 operated by market leader Redbox, owned by Coinstar (CSTR.O), claiming their prices are too low and are hurting other DVD retailers.

For its part, Blockbuster Inc, Netflix's rival, expects to have 10,000 rental kiosks by the end of next year.

NETFLIX MOVES AGGRESSIVELY TOWARD INTERNET DELIVERY

Lazard Capital Markets analyst Barton Crockett also said Netflix faced challenges in keeping investors happy at currently lofty stock prices despite its aggressive move into Internet delivery of movies to TVs and other devices.

"Expectations have gotten so ramped up for Netflix that it's hard to satisfy people," he said. "If there's anything you can poke holes at it's that they came in only at the higher end of guidance for subscribers."

Netflix ended the first quarter with about 10.3 million subscribers, up 10 percent from the fourth quarter of 2008 after previously projecting it would end the first quarter with 10.1 million to 10.3 million subscribers.

Net profit for the first quarter of 2009 rose to $22.4 million, or 37 cents per diluted share, from $13.3 million, or 21 cents per diluted share a year earlier.

Excluding items such as stock-based compensation, Netflix reported earnings of 40 cents per share versus an expected 35 cents a share, according to Reuters Estimates.

Revenue rose 21 percent to $394.1 million.

Some analysts also said they had expected more of an improvement in the company's churn rate. First-quarter churn -- the number of subscribers who elect not to renew their monthly subscription service -- was 4.2 percent, compared with 3.9 percent a year ago and 4.2 percent in the 2008 fourth quarter.

Netflix expects to end the second quarter with 10.4 million to 10.6 million subscribers, revenue of $403 million to $409 million, net income of $27 million to $32 million, and earnings per share of 44 cents to 53 cents per diluted share.

Netflix has said 1 million Microsoft Corp (MSFT.O) Xbox 360 video game console users had activated its movie streaming service, but did not say how many subscribers it had actually gained from the partnership.

It also announced plans to integrate with social networking website Facebook, whose huge community of tech-savvy users could help drive growth. Netflix plans to soon raise prices by about 20 percent to 25 percent for subscribers who rent Blu-ray discs rather than standard DVDs. Prices for the standard definition service are unchanged.

(Editing by Phil Berlowitz)