Netflix Powers Ahead

The company says it expects to hit the 4 million-user mark profitably later this year.
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beat estimates and promised to be profitable when it grabs its 4 millionth user late this year.

Shares in the DVD rental firm surged 17% in postclose trading, as Netflix offered mostly bullish guidance for the second half but tempered its year-end subscriber forecast.

For its second quarter ended June 30, the Los Gatos, Calif., company made $5.7 million, or 9 cents a share, up from the year-ago $2.9 million, or 4 cents a share. Revenue jumped to $164 million from $120 million a year earlier.

The company earned 14 cents a share on a so-called adjusted basis excluding certain costs, swamping the Thomson First Call analyst consensus profit forecast of a penny a share. Netflix cited strong cost containment, lower-than-expected marketing spending and a hefty gain on the subscriber rolls.

Indeed, the company said quarter-end users jumped 53% from a year ago to 3.2 million, as user defections as measured by so-called churn dropped nearly a percentage point to 4.7%. Netflix recorded 707,000 gross subscriber additions during the period, up 21% from a year ago but down 25% sequentially.

"Our business performed impressively across all key operating measures in the second quarter, reflecting the broadening consumer appeal of our service and the rising competitive strength of our organization," said CEO Reed Hastings. "Looking at the second half of 2005, we're confident of hitting 4 million subscribers by year's end and expect to reach that milestone profitably and as the clear-cut market leader."

The company also reaffirmed guidance for the third quarter, guiding toward earnings of around $6.25 million on revenue of $174 million. The company put period-end subscribers at 3.4 million or so. Netflix now says it expects to post a profit for the year based on generally accepted accounting practices, improving upon the previous forecast for a small loss. But the company brought the top end of its year-end subscriber forecast down slightly, to 4.05 million users from the previous 4.15 million.

The news comes as Netflix is developing a movie download service to complement its rental service, a feature that could help it increase both ad and subscription revenue. The company is trying to shake off Wall Street's perception that it will be punished by competition as outfits from


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offer to rent or sell DVDs at cut-rate prices.

In postclose trading, Netflix surged $2.80 to $19.76.