I couldn't be happier to eat crow.
I was concerned that Netflix (Nasdaq: NFLX ) was going to come in flat on the subscriber-acquisition front during the third quarter. After all, Netflix started the period with 6.74 million subscribers and had a target of 6.7 million to 6.9 million users by the end of September.
With Blockbuster (NYSE: BBI ) raising Total Access prices and more or less warning of tepid growth, I was starting to wonder why Netflix wasn't raising its guidance to account for the customers that Blockbuster wasn't claiming.
When Netflix found itself on pace to top its subscriber targets two years ago, it issued a press release to indicate as such by the end of September 2005. With a sea of crickets chirping at Netflix, I was braced for the ordinary -- and the grim possibility that the sector had peaked back in June.
I was wrong, and crow is a lot tastier than I imagined.
Netflix closed out the quarter with 7.03 million subscribers. That's a 24% improvement over last year's third quarter and a 4% sequential improvement over this year's Q2. (You can brush up on last quarter here.)
Things aren't perfect, however: Gross margins fell, and revenues posted a sequential decline. Whether it's the higher costs behind new initiatives -- such as its online streaming service -- or a matter of patrons flocking to lower-priced plans, shareholders can gladly stomach it as Netflix pursues a wider user base.
Earnings climbed 23% higher to $0.23 a share, or $0.26 per share on a non-GAAP basis. No matter how you fancy your profit flavors, Netflix obliterated Wall Street's bottom-line target of $0.15 a share.
It's certainly a good time to be Netflix. Companies from Apple (Nasdaq: AAPL ) to Amazon.com (Nasdaq: AMZN ) have been slow in growing the digital delivery of celluloid, just as store closings at physical chains such as Movie Gallery (Nasdaq: MOVI ) are sending movie buffs to the wide selections and clear convenience of the home-delivered models that Netflix and Total Access are pitching.
We'll still have to wait until Blockbuster's report before we can gauge the growth of the sector, but Netflix is starting to sound upbeat again. It even raised its guidance for a change.
The company is now looking to close out the year with 7.3 million to 7.5 million subscribers and to earn between $0.83 a share to $0.90 a share on $1.2 billion in revenue for all of 2007.
As a Netflix shareholder and subscriber, I don't mind when my crow is served sunny-side up. Yum, yum!
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