Netflix Cruises Past Q2 Expectations

The Los Gatos, Calif.-based company said Friday that it earned US$26.6 million, or 42 cents per share, from April through June, up from $25.6 million, or 37 cents per share, in the same period a year ago.

The average earnings estimate among analysts surveyed by Thomson Financial was 40 cents per share.

Sacrificing Growth Opportunities

Revenue climbed 11 percent to $337.6 million to match analyst estimates.

Netflix shares gained 32 cents, 1.2 percent, to $27.05 in Friday morning trading.

The company ended June with 8.4 million subscribers, and probably would have had even more if it had advertised its service as vigorously as it usually does.

But management has decided to sacrifice some of its growth opportunities to ensure it keeps Wall Street happy with higher profits, Netflix chief executive Reed Hastings said during a Friday conference call.

As a result, Netflix trimmed its marketing expenses by $5 million, or 11 percent, from the same time last year.

Despite the cutback and a slowing economy, Netflix had far more success luring new subscribers than last year when it lost 55,000 customers during the spring -- the only quarter that the company's service has shrunk during its nine-year history.

"We appear to be substantially unaffected by the negative economic climate," Hastings said.

Ad Budget Change Ahead?

Netflix could afford to spend less on advertising because its biggest rival, Blockbuster, has been promoting its online rental service less aggressively during the past six months.

But some analysts believe that is about to change now that Blockbuster has abandoned a takeover bid for electronics retailer Circuit City Stores (NYSE: CC) Stores and is preparing to expand its Internet presence with a pay-per-view online video service acquired last year from Movielink. In a sign that it could be gearing up for more growth, Blockbuster hired a new chief marketing officer just a few weeks ago.

Hastings, though, said he doesn't expect Blockbuster to derail Netflix this year. Underscoring management's confidence, Netflix still expects to end the year with 9.1 million to 9.7 million subscribers -- the same guidance issued three months ago.

The company also affirmed its previous profit projections for the year.

Holding the line on advertising costs will be important to Netflix because the company is spending more to develop a service that streams movies and TV shows over high-speed Internet connections.

Competition Increases

Netflix still isn't charging more money for unlimited use of the streaming service, even though its costs for licensing movies are rising as the service becomes more appealing to subscribers because of a recently introduced $100 device that automatically shows the video on TV sets instead of computers.

Hastings declined to comment Friday on unconfirmed reports that nearly 100,000 of the TV streaming players made by Roku had been sold during their first two months on the market.

Microsoft's (Nasdaq: MSFT) video game console, Xbox 360 , is scheduled to start streaming for Netflix this fall, a breakthrough that could increase the usage of the digital service even more dramatically.

Netflix also is facing higher costs to buy high-definition DVDs for subscribers with Blu-ray players, but the company has already decided to raise its prices for that luxury. Hastings said Netflix will begin testing different prices for Blu-ray DVDs during the current quarter.