Netflix's envelope runneth over

Revenue leaps while sub costs slide; shares jump 18%

Netflix reported a better-than-expected quarter Monday and raised guidance for the rest of the year, causing its stock to soar as much as 18% in after-hours trading.

The company said that it earned $15.7 million in the third quarter, up from $12.8 million last year. On a per-share basis, the company earned 23 cents, while analysts expected just 15 cents.

Revenue was up 15% to $294 million, better than the $286.5 million expected by analysts.

Netflix said it ended the quarter with slightly more than 7 million subscribers, surpassing the company's most recent guidance of ending with 6.7 million-6.9 million subs.

Subscriber acquisition costs also dropped as Netflix relied more on keeping its service affordable to consumers than it did on marketing. SAC, as it is known, dropped from $45.32 per gross subscriber addition a year ago to $37.91.

Netflix said it plans on ending the year with 7.3 million-7.5 million subscribers. Its previous guidance was 6.8 million-7.3 million. It also boosted revenue and net income guidance.

CEO Reed Hastings told analysts Monday that Movie Gallery's financial difficulties could drive business to Netflix.

"Any time video stores close, it's got to help us," he said. In the near term, though, he said he expects the first 1,000 stores closed by Movie Gallery will be ones that are near Blockbuster stores, so customers will migrate there in bigger numbers than they will to online services.

Hastings also touted "Watch Now," the company's product for allowing the instant viewing of movies on computer screens. He said that next year the service will converge with TV screens, though details won't be discussed until January.

The upgraded product, though, won't mean a "radical" change in cash flow, he said, leading observers to think Netflix has formed a partnership similar to how Amazon partnered with TiVo for Internet-based VOD to TV screens.