Netflix Profit Up 30 Percent In 3Q

Netflix Inc.'s third-quarter profit surged 30 percent despite slowing subscriber growth, which is turning into a bigger problem for the online DVD rental leader as the rapidly unraveling economy prods more consumers to clamp down on entertainment expenses.

To help boost its revenue, the Los Gatos, Calif.-based company said Monday that it will begin charging about 500,000 subscribers $1 more per month to rent high-definition DVDs made for Blu-ray players. The surcharge becomes effective Nov. 5.

As the prices of Blu-ray players continue to fall, Netflix is betting more of its subscribers will buy the high-definition gadgets - and looking for more opportunities to raise rates as the rental service braces for the second recession since its inception a decade ago.

Netflix earned $20.4 million, or 33 cents per share, for the three months ending in September, compared with $15.7 million, or 23 cents per share, in the year-earlier period.

Revenue rose 16 percent to $341 million, from $294 million last year.

Analysts polled by Thomson Reuters had projected a profit of 31 cents per share on revenue of nearly $343 million.

Netflix ended the period with 8.67 million subscribers, falling below the goals that management established in July when executives forecast the rental service might enter October with 8.8 million. The company had warned two weeks ago it misgauged its subscriber growth.

In a sign that the faltering economy is prompting more households to cut corners, Netflix lowered its target for new subscribers for the second time this month. The company said it now hopes to have somewhere between 8.85 million and 9.15 million customers entering 2009 - down by 100,000 from its Oct. 6 forecast.

Just three months ago, Netflix had hoped to end 2008 with a many as 9.7 million subscribers.

"Since July ... the economy has deteriorated markedly," Netflix Chief Executive Reed Hastings told analysts in a conference call Monday. "It now appears that the recession means continued subscriber growth for Netflix, but not as fast as last year."

Through the first three weeks of October, Netflix had signed up about 30 percent fewer new customers than at the same time last year. About 4.2 percent of Netflix's existing subscribers dropped the service, unchanged from a year ago but slightly higher than management expected.

Netflix shares gained 20 cents in Monday's extended trading after ending the regular session at $23.80, up 50 cents.

Despite the daunting economy, Netflix maintained its earnings outlook for the remainder of the year. That's an indication that management believes it can retain most of its existing customers while cutting some costs, including the amount it spends to attract new customers.

That expense, known as "subscriber acquisition cost," totaled $32.21 per customer in the third quarter, a 15 percent drop from $37.89 per customer a year ago.

Netflix also pared its general and administrative expenses by 9 percent from last year to $11.7 million. The company attributed most of those savings to a decision to close a subsidiary that helped finance movies that couldn't get the backing of major film studios.

Meanwhile, Netflix's marketing expenses were essentially flat at $49.2 million. The company is spending more to support an online streaming service that pipes more than 12,000 movies and TV shows over high-speed Internet connections at no extra cost to subscribers.

Netflix believes it can recoup of its investment in the service if it causes subscribers to request fewer DVDs through the mail - a development that would reduce the company's postal expenses and decrease the number of discs that have to be stocked in its distribution centers.