Netflix 3Q profit tops analyst estimates

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Shares of Netflix Inc. soared in after-hours trading Monday when the company posted strong quarterly earnings and subscriber additions, offering evidence that it still is manhandling its primary competitor, Blockbuster Inc., in the subscription DVD business.

Netflix earned $12.8 million in its third quarter, up 84.2% from the $6.95 million it earned a year ago. Revenue surged 48.2% from $172.7 million last year to $256 million.

The company added 493,000 net new subscribers, bringing its total to 5.7 million, up 57.6% from the 3.6 million the company boasted at the end of the third quarter last year.

Churn also declined year-over-year from 4.3% to 4.2%, easing analysts' concerns that the company hasn't been able to improve on that score.

During a conference call with analysts Monday, CEO Reed Hastings stressed that the company has learned of a seasonal element to churn, which executives intend on exploiting "as the northern climate gets cold and dark."

Netflix handily beat Wall Street expectations on the most important metrics and its stock jumped as much as 15% after the closing bell. The DVD-by-mail pioneer finished the regular session up 3.8% to $23.08.

Blockbuster, meanwhile, said Monday that it will end its lowest price plan, which was $5.99 for two DVDs per month, and will test a program allowing subscribers to return their DVDs to one of its physical stores as well as via the U.S. Postal Service. Shares of Blockbuster fell 1.6% on Monday to $3.78.

Hastings said that Netflix should end the year with 6.3 million subscribers and noted that Blockbuster has predicted 2 million subs by year's end to its competing service, translating to 8.3 million people "not renting at stores."

He predicted that the major bricks-and-mortar movie-rental chains will close 5%-10% of their stores next year in response to the popularity of the subscription model.

Hastings said the company will spend about $40 million to develop a system for using the Internet to deliver movie rentals, similar to how Amazon.com and Apple Computer Corp. are delivering digital content. As it pertains to feature films, those companies, Hastings said, are focusing on download to own whereas Netflix will concentrate on movie rentals.

The CEO deflected several questions from analysts seeking details of Netflix's digital-delivery plans, but Hastings offered little more than: "In 90 days we'll give you a full briefing."

Hastings said "the only dark cloud we see" in the business is the format war between HD-DVD and Blu-ray Disc, the next-generation DVD technology. Most consumers, Hastings said, will stay away from either format until the press declares a victor.
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