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Netflix profit jumps 22%

The DVD-rental-by-mail service is benefiting from consumers' growing preference for renting rather than buying videos during the economic downturn.

July 24, 2009|Ben Fritz

Apparently it's better to rent than to own DVDs during a recession.

While movie studios are reeling from plunging DVD sales, which were down 13.5% in the first half of the year, DVD-by-mail subscription company Netflix Inc. saw its revenue surge 21% to $408.5 million in the second quarter that ended June 30. Net income was $32.4 million, up 22% from the same period a year ago.

The company's performance reflects an overall trend in the industry: Consumers are renting more movies and buying fewer as they cut spending during the economic downturn. Last week the Digital Entertainment Group, a trade group backed by the Hollywood studios and hardware manufacturers, reported that rental revenue rose 8.3% in the first six months of the year.

But most of that growth isn't going to rental chains like Blockbuster Inc., which hasn't yet reported earnings for the second quarter but saw a 20% decline in revenue during the first. Instead, consumers are flocking to Netflix and DVD kiosk company Redbox Automated Retail, which rents DVDs for $1 a night.

"Netflix and Redbox are growing at the expense of video stores," Netflix Chief Executive Reed Hastings said in a conference call with analysts.

The company added 289,000 net subscribers in the quarter, bringing its total to 10.6 million. In the same three-month period last year, it added 168,000.

Netflix wasn't entirely immune from the recession, however. Average monthly revenue per customer declined 4% to $13.29 as lower-priced plans became more popular. Nonetheless, that didn't damage Netflix's bottom line, because those plans, which let customers rent fewer movies at a time, have higher profit margins. Average monthly gross profit per subscriber rose 3% to $4.53.

The company also raised its business forecast for the full year. Netflix now projects it will have 11.6 million to 12 million subscribers by Dec. 31. Projected revenue is $1.65 billion to $1.67 billion, and net income is expected to be $99 million to $109 million.

Profit growth is expected to be aided by Netflix's small but growing Internet streaming service, which lets customers watch movies on a computer or on a TV through a Web-connected device.

Hastings told analysts that as revenue continued to grow, the company would spend more to acquire content from movie studios for its streaming service, which is more profitable because bandwidth costs are significantly lower than disc-shipping costs.

"Our mission is to move our costs, which are currently about 50% postage and 50% content," he said. "The long-term vision is that studios get two-thirds of our spending and we don't have to ship as many DVDs."

Netflix shares rose $1.18, or 2.6%, to $46.46 before earnings were announced. They are up 55% for the year.


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