Earnings: Netflix Profits, Revs Gain In Q2; Subs Drop Slightly From Q107

As it continues to battle against rival video renter Blockbuster for subscribers, Netflix (Nasdaq: NFLX) reported that Q2 GAAP income rose 50 percent to $25.6 million from $17 million last year. The online video renter also posted higher revenue of $303.7 million, a 27 percent year-over-year rise from $239.4. Compared to Q107, however, the company, which recently cut some of its monthly plans by $1, experienced a 1 percent decline from $305.3 million (This was the company’s third price reduction this year, the other two occurred in February and June). Other highlights from Q2:

— Netflix grew its subscriptions by 30 percent to 6,742,000 total subscribers from 5,169,000 total subscribers at the end of Q206. In line with its slight revenue decline, subs slipped 1 percent from the previous quarter.

— Churn was 4.6 percent, compared to 4.3 percent a year ago. The subscriber cancellation rate for Q107 was 4.4 percent.

— In its outlook for Q3, Netflix expects to have a range of subs between 6.7 million and 6.9 million. It anticipates ending Q3 with revenues between $284 million to $289 million. More to come. Earnings release | Webcast (5:00 p.m. EST)

Update: Typically, Q2 is Netflix’s most profitable quarter and a 5- to 10 percent increase in sequential subs, said Reed Hastings, the company’s founder and CEO. But competition from Blockbuster’s online rental feature Total Access – which provides free a in-store rental when an online customer returns a DVD to a Blockbuster location – led to its 1 percent decline, he told listeners on the company’s afternoon conference call. “We expect to return to positive growth in the second half of 2007, even if it means no relief from the current competitive environment.” Concluding that Blockbuster will remain in “online growth over profits mode,” Netflix will do the same, Hastings added. As a result, the company will reduce its marketing spending somewhat.

— Also eating into the company’s profits were costs associated with a first class postal rate hike and further development of its Watch Now online video feature, which was rolled out last quarter. “With the growing popularity of our online video feature, we expect those costs to increase over the next two quarters,” said Barry McCarthy, Netflix’s CFO.

— Aside from online video downloads, Netflix is placing its long-term growth on adding direct-to-TV video rental. Hastings said that the company expects to have agreements with partners in place by next year.