Netflix first-quarter earnings top analyst views as service adds 1.7 million more subscribers

Netflix 1Q profit rises with 1.7M more subscribers

SAN FRANCISCO — Netflix Inc.’s movie subscription service attracted 1.7 million more customers during the first quarter to fuel a torrid growth streak that has turned the company into a stock market star.

The results announced Wednesday are the latest evidence of Netflix’s rising popularity. The service has picked up more than 5 million subscribers in the past 18 months as more households embrace Netflix’s DVD-by-mail and Internet video packages that start at $9 per month.

That has helped Netflix to boost its earnings by at least 22 percent in each of the past six quarters, including a 44 percent gain during the first three months of the year.

Netflix’s stock price has more than tripled during that span, and the strong first-quarter performance persuaded more investors to buy the shares. The stock gained $1.32 in extending trading Wednesday after ending the regular session at $86.98, down 9 cents.

“It was another slam-dunk quarter for them,” Signal Hill analyst Todd Greenwald said. “They are in a real sweet spot right now.”

The strong start to 2010 emboldened Netflix to management to predict the company could make as much as $144 million, or $2.61 per share, this year, up from earlier guidance of $137 million, or $2.50 per share. The rosier outlook makes it more likely that Netflix could earn $3.50 per share in 2011, which could justify Netflix’s stock price soaring to $100, Greenwald said.

Netflix ended March with nearly 14 million subscribers and expects to add another 700,000 to 1 million customers by July. That could prove to be a conservative estimate, given that the first-quarter growth blew past management’s expectations.

The company, based in Los Gatos, earned $32.3 million, or 59 cents per share, in the first three months of the year. That compared with net income of $22.4 million, or 37 cents per share, at the same time last year.

The earnings per share came in a nickel above the average estimate among analysts polled by Thomson Reuters.

Revenue climbed 25 percent to nearly $494 million, matching analyst estimates.

Although Netflix began as a DVD-rental service and the discs remain its main drawing card, streaming video over the Internet has been playing an increasingly bigger role in the company’s success.

The digital delivery option is becoming more prevalent as Netflix links its service with video game consoles, Blu-ray players and other Web-enabled gadgets that can easily be plugged into flat-panel televisions.

Netflix said 55 percent of its subscribers viewed on its Internet streaming service in the first quarter, marking the first time at least half its audience was using the option.

The company has been aggressively pushing the Internet option to save on postage to ship DVDs. Netflix also wants to make sure it has a thriving digital video service to remain relevant as DVDs wane in usage, and it faces more competition for other Internet video services from the likes of Amazon.com Inc., Wal-Mart Stores Inc. and Best Buy Co. Inc.

Even more subscribers are expected to use Internet streaming as Netflix licenses more titles from movie studios. To expand that library, Netflix has been agreeing to delay sending out newly released DVDs for four weeks to give the studios a better chance to sell the discs in stores.

The delays in sending out the latest DVDs could slow Netflix’s growth if impatient customers decide they don’t want to wait the additional 28 days and defect to rivals, such as Blockbuster Inc., which are renting the movies at the same date they go on sale.

It hasn’t had an effect so far: Netflix’s first-quarter cancellation rate of 3.8 percent was the lowest in its 11-year history. But Netflix hasn’t had to delay delivery on many hot movies yet. One of the biggest tests of its subscribers’ patience may come Thursday when the “Avatar” DVD goes on sale. The movie won’t be available on Netflix until May 20.