Shares of Netflix, Inc. (Nasdaq: NFLX) were up more than 14 percent from Wednesday’s closing price, in morning trading on Thursday after the movie rental company announced third quarter earnings that edged out the Street’s estimates, largely driven by a higher number of customers that rent movies online, and lower subscription acquisition costs.
Netflix posted revenue of $553.2 million, up from $423.1 million a year ago. Excluding stock-based compensation, Netflix earned 78 cents per share, although GAAP earnings were 70 cents per share, just shy of analysts’ estimates of 71 cents. Netflix ended the quarter with 16.9 million subscribers, up 13 percent sequentially and 52 percent over the third quarter of last year. Gross margin dipped to 37.7 percent from 39.4 percent in Q2.
The company said 66 percent of its subscribers watched streaming videos in the quarter, up from 41 percent a year ago. Subscriber acquisition costs fell to $19.81 in the quarter, from $26.86 a year ago. Churn fell to 3.81 percent, from 4.4 percent a year ago.
Netflix now sees ending Q4 with 19 million to 19.7 million subscribers, up from a previous estimate of 17.7 million to 18.5 million. The company now sees Q4 revenue earnings of between 59 cents and 74 cents per share, and revenue between $586 million and $598 million, up from earlier estimates $580 million to $596 million.
“Q3 represents our fourth consecutive quarter of more than one million net subscriber additions,” said Reed Hastings, co-founder and CEO of Netflix in a statement. “This growth is clearly driven by the strength of our streaming offering. In fact, by every measure, we are now primarily a streaming company that also offers DVD-by-mail,” said Reed Hastings, Netflix co-founder and CEO. “At the same time, the introduction of our streaming offering in Canadain late September has provided us with very encouraging signs regarding the potential for the Netflix service internationally.”
Several analysts upgraded their ratings of Netflix, including Oppenheimer analyst Jason Helfstein, who raised his rating on Netflix shares to Outperform from Underperfrom; Janney Capital analyst Tony Wible, who raised his rating to Neutral from Sell; Merriman Capital analyst Eric Wold, who raised his rating on Netflix shares to Buy from Neutral; and Needham analyst Charlie Wolf, who trimmed his 2010 EPS estimate to $2.85 from $2.90, but lifted his 2011 view to $4.55 from $4.00.
“Our original thesis was dependent on Hollywood reacting to the NFLX competitive threat through various ways, including its own IPTV service (Hulu), new services with cable companies (TV Everywhere) and reducing the amount of TV content available to NFLX,” Helfstein wrote. “None of this has happened, and we are now at the beginning of the IPTV revolution, with NFLX in the dominant position.”