Earnings: Netflix Q4 Profits, Revs Rise, Barely Beating Estimates; Subscriber Costs Shrink A Bit

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Earnings: Netflix Q4 Profits, Revs Rise, Barely Beating Estimates; Subscriber Costs Shrink A Bit

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Video renter Netflix (NSDQ: NFLX) posted higher profit and revenue in Q4, suggesting that perhaps a bad economy can be good for companies that cater to home entertainment. The Los Gatos, Calif.-based company’s Q4 net income was $22.7 million ($0.38 per diluted share) just above FactSet Research’s analysts poll (via MarketWatch) which called for $0.36 per share and 44.6 percent higher than Q407’s $15.7 million ($0.23 per diluted share). Revenue was $359.6 million, a 19 percent year-over-year gain from $302.4 million.

—Subs: The DVD renter had 9.3 million customers, a 26 percent year-over-year rise from Q407’s 7.4 million subs. Most importantly, subscriber costs were lowered to $26.67 compared to $34.58 the previous year.

—Churn was 4.2 percent—the same as it was in Q308—though slightly up over Q407’s 4.1 percent.

—Free cash flow was $51 million, more than double Q407’s $21.1 million. Free cash flow for fiscal 2008 was $94.7 million compared to $45.9 million in fiscal ‘07.

—Stock buyback: Netflix’s board has authorized a stock repurchase program for this year, allowing the company to buy back up to $175 million in stock.

Release | Transcript (via Seeking Alpha)

Staci adds from the conference call (via Seeking Alpha transcript): The questions were handled by e-mail, not a usual practice. CEO Reed Hastings admitted “in hindsight” the company lowballed subscriber growth for Q4; he said the “under-forecast” resulted from underestimating the positive impact of the new streaming devices from LG (SEO: 066570), Samsung, Microsoft (NSDQ: MSFT) and TiVo (NSDQ: TIVO)—and better-then-expected responses to marketing: “The precise impact of the recession is unclear but it’s very clear that streaming is energizing our growth.” LG and Samsung deliver higher percentages purchasers who subscribe to Netflix; Netflix pays for lead gen.

More after the jump...

—Blu-Ray: About 700,000 Netflix subs were renting Blu-Ray discs by the end of Q4. “If Blu-Ray player prices continue to fall as expected driven by next generation chip designs then wide adoption becomes increasingly likely and with it extended life of disk based viewing.”

—Upside from Amazon: Hastings says Amazon (NSDQ: AMZN) Pay-Per-View is more competition, but also more promotion for device streaming.

—Growth and reinvestment: CFO Barry McCarthy said the goal for 2009 is to grow net income by at least 12 percent “even as we significantly increase our investment in Internet streaming.” A better net income performance would provide more money to “reinvest” in more spending on streaming and/or subscriber acquisition growth.

—Dedicated streaming: A dedicated streaming service may happen but, said Hastings, “... we don’t think there’s a big market there for streaming only given the content availability situation which is roughly 100,000 titles on DVD and about 12,000 on streaming.” But no plans for renting or selling digital downloads.

—International: Hastings said the streaming success “only slightly” renews interest in going international: “We would be on the international doing streaming only there and I don’t know if there’s enough content and a large enough eco system to do that.” For now, the focus is on growing U.S.

By David Kaplan