What a difference three months can make. Netflix left investors grinning this week when it announced better than expected results for the third quarter, following a dismal second quarter.
Here’s the good news: Nearly 300,000 new subscribers, boosting the company’s total subscriber base to 7.03 million. Revenue jumped 15% over the third quarter of 2006 to $294 million, up from $255 million, and profits were up 23% over 2006′s third quarter to $15.7 million.
As a result, the company has raised its fourth-quarter guidance, anticipating sales of between $297 and $302 million instead of the previously announced $277 to $287 million. It plans to attract up to 7.5 million subscribers by year’s end, instead of 7.3 million.
The news sent stock prices up accordingly, more than 10%. Netflix started Thursday at $25.25 a share. (A buzz is also building about Netflix CEO’s Reed Hastings’ comments about possibly distributing movies via Internet-connected game devices such as the Xbox or Playstation.)
Netflix rebounded from its second quarter results, when it reported that it lost subscribers — some 55,000 — for the first time in its history. (I discussed the situation in a post back in July.) To blame, arch-nemesis Blockbuster‘s Total Access program that was attracting customers with its low price and flexibility allowing renters to get movies in the mail or in stores.
Blockbuster, which had been losing money on the popular plan, decided to raise the price on Total Access and added some restrictions to the plan. Netflix, meanwhile, cut prices on its most popular plans in recent months while reducing its overall marketing spend.
Another change in the movie rental landscape: Movie Gallery, owner of 4,600 video stores under the Hollywood Video and Movie Gallery names, filed for bankruptcy earlier this month. As a cost-cutting measure, it plans to close more than 500 of its stores.
Blockbuster’s stock dropped this week after a JPMorgan analyst downgraded the stock, suggesting that it should concentrate on its long-term growth. But Netflix is not off the hook, even with its positive results. Analysts continue to express concern about the company’s long-term digital strategy and continued fight with Blockbuster. Blockbuster will announce its third quarter results on Nov. 1st, so we’ll have to wait to see which strategy prevails.
Movie Gallery’s acquisition of Hollywood Video for $1.2 billion in 2005 has eventually put a few holes in its corporate ship. But the company’s early 2007 purchase of MovieBeam, a video-on-demand service available in more than 30 markets in the US, may help turn around Movie Gallery and point it toward a different, more profitable business strategy.