Netflix ( NFLX) reported a 61% drop in fourth-quarter earnings Wednesday, due in part to a tax gain it recorded in 2005, but the results topped Wall Street's expectation. The online DVD rental service reported net income of $14.9 million, or 21 cents a share, down from the $38.2 million, or 57 cents a share, it recorded for the same quarter a year earlier. The 2005 quarter benefited from a deferred tax benefit of $34.9 million, or 52 cents a share. Analysts polled by Thomson Financial, on average, expected earnings of 15 cents a share for the last quarter. Shares of Netflix recently were up $1.75, or 7.7%, to $24.50 in after-hours trading. Those gains came on top of the stock's 4.5% rise during the regular trading session. On its top line, Netflix reported revenue of $277.2 million, up 44% from $193 million a year earlier and in line with Wall Street's estimate. The jump was powered by subscriber growth that left Netflix with around 6.31 million subscribers at the end of the quarter, compared with a total of 4.18 million at the end of 2005 and 5.66 million at the end of the third quarter. The company's closely watched churn rate, which measures the number of subscribers that opt out of the service, declined during the quarter to 3.9%, compared with 4% for the year-ago period and 4.2% for the third quarter of 2006.
Looking ahead, Netflix expects to finish its first quarter of 2007 with 6.7 million to 7 million subscribers and revenue of $304 million to $310 million. For the full year, the company expects revenue of $1.25 billion to $1.3 billion, with a total of 8 million to 8.4 million subscribers. Analysts expect revenue of $309 million for the first quarter and $1.36 billion for the year. "2006 was a solid year for Netflix, demonstrating again the strength of our business model," said Netflix in a press release. "Our accomplishments during the year -- strong subscriber growth, continued improvement in the customer experience, and increased profitability -- together with the recent launch of the first generation of our online video option, leave us better positioned than ever to achieve our long-term objective of being the movie rental leader." On a conference call with analysts following the release, Netflix executives reiterated the company's long-term goal of winning 20 million subscribers by 2010 to 2012. CEO Reed Hastings acknowledged that this goal would require an acceleration from current growth levels, but he noted that "2012 is a long way off, and a lot can happen between now and then." Starting with a vision of using the Internet to deliver movies to customers at their homes, Netflix quickly proved that it could win over a significant customer base with its flagship service that delivers DVDs to subscribers in the mail. But after its initial growth push, the company's business model has been copied by Blockbuster ( BBI) and others, and its future has remained a question mark for investors who foresee online downloads rendering the mail-order business model obsolete as Internet adoption grows and service improves. Recently, the company unveiled a plan to roll out
a new "watch now" feature on its Web site that allows subscribers to watch some movies and TV shows immediately on their personal computers in streaming video format. The step shows how Netflix might continue to gain relevancy in the future, but the company still faces legal issues in gaining the rights to distribute popular films over the Internet on a subscription basis.