Netflix Adds More Subscribers Than Expected

CEO Reed Hastings has done it again: Netflix bested Wall Street expectations in the third quarter, adding 1.932 million subscribers in the quarter. The movie rental company ended Q3 with 16.9 million subscribers on $553 million in revenue, a hair higher than Wall Street expected. GAAP earnings came in at 70 cents per share — that's a penny shy of Wall Street expectations. Gross margins for the quarter were 37.7 percent — analysts were expecting 37.4 percent.


Some big news in the "management commentary" issued along with results.

The company is testing a pure-streaming model in the US and will look to roll it out later this year. Hastings says: "pure streaming could become our core offering in the USA and DVD would be offered as a supplement for an additional charge, like we offer Blu-Ray today."

Hastings went into great detail on the success of the company's streaming option: in Q4 they'll spend more on streaming than on DVD content, and they'll deliver more hours of entertainment via streaming than DVD. Streaming is growing much faster than DVD-by-mail — Q3 revenue grew about 30 percent but shipments grew about 10 percent.

Also on the horizon: International growth. Netflix's expansion into Canada has been successful, and they're on track to be profitable late next year. Hastings writes: "If we continue to gain confidence in a large return on our Canadian investment, and we have confidence in the financial return on further geographic expansion, then we'll look to grow beyond North America starting in the second half of 2011." That's a lot of ifs, but Hastings does say the company would invest some $50 million to expand beyond North America.

Hastings acknowledges the increasingly crowded and complicated landscape. But in response he says Netflix is adding new partner devices and working to upgrade the Netflix streaming experience on existing devices.

Q4 is looking rosy: Netflix is projecting 58 percent subscriber growth, 33 percent revenue growth and EPS growth of 19 percent. The company raised its Q4 revenue guidance to $586 million - $598 million.

The company doesn't host a traditional earnings call, but instead just does a Q&A at 6 pm Eastern. I'll be listening for any more details on strategy for international and digital expansion.

Questions? Comments?