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Netflix's Profit Nearly Triples

The Web-based DVD rental company's sales soar 46%. But a warning for the rest of 2006 pulls shares down 21% in after-hours trading.

July 25, 2006|From Reuters

Online DVD rental company Netflix Inc. reported a sharp rise in quarterly earnings Monday but disappointed investors by indicating that results for the rest of the year would be lower than expected, driving its shares down 21% in after-hours trading.

Net income for the second quarter was $16.8 million, or 24 cents a share, compared with $5.7 million, or 9 cents, a year ago. Revenue rose 46% to $239.4 million.

Analysts polled by Reuters Knowledge, on average, expected Netflix to post earnings per share of 18 cents and revenue of $241.7 million.

Netflix stood by its 2006 forecast, calling for net income of $30 million to $35 million, revenue of at least $980 million and year-end subscribers of at least 6.3 million.

Wedbush Morgan analyst Michael Pachter said investors were disappointed that the company did not raise its full-year forecast after beating expectations by such a large margin in the latest quarter.

"They maintained [their forecast] and that essentially means that they lowered it for the back half of the year," Pachter said.

Wall Street analysts were expecting profit for the year of $36.2 million, or 53 cents a share, and revenue of $1.01 billion, according to Reuters Estimates.

The company had 5.17 million subscribers in the second quarter, up 62% from the first quarter.

In April, Netflix forecast second-quarter revenue of $238 million to $242 million, 5.1 million to 5.3 million subscribers and net income of $9.5 million to $13.5 million.

On Monday, Netflix said it expected third-quarter net income of $5 million to $10 million. Analysts are expecting $10.6 million.

It also forecast fourth-quarter profit of $3.8 million to $8.8 million. Analysts are expecting earnings of $8.8 million, according to Reuters Estimates.

Subscriber acquisition costs rose to $43.95 from $38.13 a year ago, while subscriber cancellations fell to 4.3% from 4.7% in the same period last year.

During the quarter, Netflix sued Blockbuster Inc., claiming its online rental service was infringing two Netflix patents. Blockbuster has countersued, alleging antitrust violations.

In May, Los Gatos, Calif.-based Netflix agreed to offer a month of free rentals to 5.5 million current and former subscribers to settle a class-action lawsuit that alleged the company delayed shipping DVDs to high-volume customers to artificially hold down their usage.

The company has admitted no wrongdoing and the settlement is not yet finalized.

Netflix shares were down 20% at $18.90 in after-hours trading after closing at $23.76.

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