Earnings: Netflix Q4 Revs Up 9 Percent And Income Up 6 Percent; 18 Percent Subscriber Growth

Netflix (NSDQ: NFLX) has reported Q4 revenue of $302.3, up 9 percent from $277.2 million in the year-ago period. Net income rose 6 percent, to $15.7 million from $14.8 million. The company said it ended the quarter with 7.47 million customers, representing 18 percent year-over-year growth and 6 percent sequential growth. Other highlights:

— The net subscriber gain the quarter was 451,000, down 654,000 in the year-ago period.
— Subscriber acquisition costs fell to $34.60 per gross add from $44.31.
— Gross margins fell to 33.8 percent from 38.9 percent, although net margins stayed relatively stable at 5.2 percent, compared to 5.4 percent.
— Looking ahead one quarter, the company is forecasting 7.85-8.05 million subscribers, revenue of $323-$328 million and net income of $9 million to $14 million.

Release | Webcast

Conference call: Rather than start with a laborious run-down of the earnings release, Netflix CEO Reed Hastings kicked things off with a direct discussion of the important issues: competition and digital delivery. He noted that in 2007, the company’s subscriber numbers were hit by Blockbuster (NYSE: BBI), which competed aggressively on price (a point that’s been made several times before). In 2008, Netflix is predicting more net adds than in 2007, as Blockbuster will not compete as aggressively. Growth will be mitigated somewhat as the company decreases marketing costs directly.

Competition: On Blockbuster: “While they appear to have shifted from valuing profit over growth, they can shift (back) at any time.” Any future attack is likely to be less painful, however.. Redbox kiosk service: Kisoks hurt video stores more than Netflix, so they may prove to be a net benefit if it causes more video stores to go out of business. On Cable/Internet VOD: not a short-term threat. Cable and internet VOD have similar pricing and content availability. Prices are higher at this model and the availability of titles is still limited “DVD continues to have many advantages”: Earlier window for releases, ubiquity of content, prices. “DVD is simple, cheap and ubiquitous.” Since Blockbuster raised its prices, Netflix has seen a modest improvement in acquisition, however the company hasn’t seen a change in the number of customers that say they are leaving for Blockbusters. So it would be too soon to say that Blockbuster Online is dead.

Internet delivery: “Positioning ourselves to fully capitalize on internet delivery…Over the last year, we’ve tripled the amount of content we stream.” “Netflix now offers for one low price, unlimited DVD rentals and unlimited screening… consumers love the unlimited subscription model.” “We hope in 2008 to be able to support web-based viewing on the Macintosh… the hold back has been the lack of a DRM solution on the Mac.” Also in 2008: Netflix will expand its streaming to game players, internet-enabled set-top boxes, etc. Biggest advantage for Netflix over other companies doing digital delivery: ability to bundle with a DVD service and the community that’s been built up at Netflix.com. CFO Barry McCarthy later added: Consumer demand for internet video will really begin to take off when it’s easy to watch internet video on the TV set and there’s a full slate of content available. In the meantime, the Netflix brand grows. Cannibalization? Without a control group, it’s difficult to say whether the existing streaming solution is affecting DVD viewing. Unlimited streaming: increased benefit to the customer is greater than the increased costs.

Subscriber growth: Subscriber growth in the latest quarter was down in part because in the previous year’s quarter, Blockbuster wasn’t promoting its Total Access service. But in the coming quarter, the company will have an easier comparison.

HD-DVD: Blu-Ray appears to have advantage. Key thing to watch for: lower priced Blu-Ray prices and full studio commitment. When these milestones are hit, Netflix expects to benefit.

Beyond LG: The plan is to make the LG (SEO: 066570) partnership a success, which will encourage other CE manufacturers to want to partner up. Plan is to expand with more partners starting in 2010.