Online DVD renter beats B'buster challenge

Shares in Netflix soared nearly 15% in after-hours trading as the Netco surprised Wall Street with its resilience against an aggressive threat from Blockbuster in the fourth quarter.

Online DVD rental shop ended the year with 2.61 million subscribers, a gain of 318,000 during the quarter. Revenue for the fourth quarter was $143.9 million, up 77% from a year ago, while net income more than doubled to $4.8 million.

All figures were on the upper end of Netflix’s guidance.

After Blockbuster’s online rental service grew quickly out of the gate last summer and it became clear Amazon.com might enter the market, Netflix reversed an earlier price increase to bring its monthly fee down to $18 at the end of the third quarter. Blockbuster followed with another price cut in December, bringing its price down to $15.

Churn during the quarter, during which the two companies spent some time nearly even in price and some with Netflix at a disadvantage, was 4.4%, a record low and down from 5.6% in the previous quarter.

Netflix dissed its competition several times during an investor conference call, estimating Blockbuster has invested $100 million in its online service in the past six months and that it is losing money on every sub at its current $15 price point.

Blockbuster has yet to report earnings for the fourth quarter and provide details on the performance of its online service. Company previously predicted it would end 2004 with 500,000 subs after launching in July.

For all of 2004, Netflix more than tripled its net income to $20.8 million on revenue of $506.2 million, an 86% increase from 2003.

With prices still low and spending on marketing high, Netflix is expecting it will lose $16 million-$19 million in the current quarter and $5 million-$15 million for all of 2005. Revenue guidance is $149 million-$154 million for the first quarter and $700 million-$730 million for the year. Netflix expects to end 2005 with 3.85 million-4.15 million subs.

Netflix also expects to spend $7 million-$14 million this year on its Internet video-on-demand offering, which it will launch during 2005. It expects Internet VOD to have little impact on its performance for several years.

After closing up 1% at $11.14 before earnings were announced, Netflix stock surged 15% in after-hours trading to $12.78.

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