Netflix Scores With Price Cuts

Updated from 4:57 p.m. EDT

Price cuts enabled Netflix (NFLX Quote) to regain its footing in the online DVD rental market after a challenge from Blockbuster (BBI Quote) spooked the company and its investors.

The Los Gatos, Calif., company rebounded from a dismal second-quarter performance to report a third-quarter jump in subscribers and earnings that demolished expectations. Netflix also cranked up its outlook for 2007 and 2008, reflecting a dramatic swing in its public view of its own prospects.

Shares were up $2.89, or 12.6%, to $25.90 in recent after-hours trading.

In July, the company reported its first-ever sequential decline in subscribers, and Netflix CEO Reed Hastings called Wall Street's outlook on the company's prospects "excessively optimistic." Chief Financial Officer Barry McCarthy predicted a decline in annual net income in 2008 -- a forecast that sent the company's shares tumbling.

"Ninety days later, we see a very different picture," said McCarthy on a conference call Monday that followed Netflix's afternoon earnings release.

The improvement comes after Netflix lowered the prices on its subscription service to better compete with Blockbuster's competing offering. But Netflix also reduced its marketing expenses to offset the price cuts, enabling it to rejuvenate its subscriber tallies without sacrificing profits.

The company reported third-quarter net income of $15.7 million, or 23 cents a share, up from $12.8 million, or 18 cents a share, in the same period last year. The results blew past Netflix's guidance for earnings of 11 cents to 19 cents a share.

Analysts expected earnings of 15 cents a share, according to the average estimate reported by Thomson Financial.