Netflix Q3 profit beats estimates, stock down

LOS ANGELES (Reuters) - Online DVD rental company Netflix Inc posted a third-quarter profit that beat Wall Street estimates, but cut its current-quarter subscriber outlook because of the slowing economy, sending its shares lower in after-hours trading.

A DVD rental from Netflix is seen in Medford, Massachusetts July 25, 2008. REUTERS/Brian Snyder

Net income grew to $20.4 million, or 33 cents per diluted share, from $15.6 million, or 23 cents per share, in the year-ago quarter. Excluding items, net income totaled $22.1 million, or 36 cents a share, which exceeded analysts’ average forecast of 34 cents, according to Reuters Estimates.

“I think people are encouraged that anyone in this environment is able to toe the line on earnings, but if you look under the covers, there is concern about subscriber growth that now looks to be coming in just below what they guided,” said Barton Crockett, analyst at JPMorgan, which has a banking relationship with Netflix.

Netflix ended the quarter with 8.67 million subscribers, versus 7 million a year earlier, but said it now expects to end the fourth quarter with 8.85 million to 9.15 million subscribers.

That is a reduction from its forecast earlier this month of 8.95 million to 9.25 million, compared with its July estimate of 9.1 million to 9.7 million.

Netflix on October 6 cut its fourth-quarter outlook, blaming the U.S. economic turmoil for weaker-than-expected subscriber growth in the third quarter.

“This is showing that the sales of Netflix subscriptions are not totally immune to the broader economy,” said Crockett, adding, “That said, this is a company that doesn’t have a balance sheet problem, has a lot of cash and is buying back its stock. While its business is not immune, it’s not as hard-hit as others,” he said.

Wedbush Morgan Securities Michael Pachter said investors were encouraged by an improvement in the company’s gross margins.

Gross margin for the third quarter of 2008 was 34.2 percent, compared with 33.9 percent for the third quarter of 2007 and 31.8 percent for the second quarter of 2008.

Netflix shares initially rose in after-hours trade after the results were released, but then edged down to $23.50 from its close of $23.80 on Nasdaq.

Editing by Richard Chang