Netflix Fades to Black

In theatrical terms, fading to black refers to the dimming lights at the end of a scene. For DVD rental specialist Netflix (Nasdaq: NFLX  ) , it represents a new beginning. The company's return to profitability for the June quarter came as a welcome surprise. Many figured that heated competition from Blockbuster (NYSE: BBI  ) and a price war that was initiated to keep Amazon.com (Nasdaq: AMZN  ) away would make the company's financial statements a barren wasteland in the near term.

Not quite. Earnings more than doubled to $0.09 a share from a $0.04-per-share showing last year. Backing out stock compensation expenses would have seen the bottom line climb from $0.11 per share last year to $0.14 this time around in pro-forma profitability. Revenue rose by 37% to hit $164.5 million. Netflix closed out the quarter with 3.2 million subscribers. That means that 53% more users are now counting on red envelopes in their mailboxes to expand their movie-watching experiences.

Things couldn't be better for Netflix. It now seems the Amazon.com threat is less likely. Netflix has reached critical mass and mastered the distribution-center process to the point where it can profitably charge $17.99 a month for its popular unlimited DVD rental program. Netflix has grown nicely despite Blockbuster marketing its service at an aggressively discounted price, and Amazon is unlikely to surf those bloodied low-priced waters. Wal-Mart (NYSE: WMT  ) recently bowed out after an inconsequential stint as a disc loan shark. Netflix's ability to produce an historically low 4.7% churn rate despite the cheaper Blockbuster option should be enough to scare anyone from trying to compete against Netflix on price.

Netflix expects to close out the year with between 3.85 million and 4.05 million subscribers. Revenue guidance for 2005 inched higher as the company is looking to produce a top-line showing between $678 million and $688 million. Three months ago, the company braced investors to expect revenue to come in as low as $660 million. But more importantly, it is looking to earn between $2.4 million and $11.9 million this year. It may not seem like much. It represents earnings per share of just $0.26 on the high end. However, until now it had projected a small loss for the year as a whole.

It was just an all around solid report from the company. Shares of Netflix had more than tripled since being singled out as a recommended stock in our Motley Fool Stock Advisor newsletter service two summers ago. The stock is also trading nicely higher as an active selection after being picked again by David Gardner earlier this year.

Yes, Netflix has its challenges, but it's not afraid to take them on. The company has teamed up with TiVo (Nasdaq: TIVO  ) to develop a video-on-demand platform, and earlier this month it launched an ad sales program that will help diversify the company's revenue base while cashing in on its well-heeled captive audience.

It's pretty amazing to think that just three months ago the dark clouds were circling over Netflix. Shares could have been purchased in the single digits. They have now doubled off those April lows.

So what does fade to black mean for both Netflix and theater? In both cases, the desired result is a round of applause.

Rewind for further Foolishness:

Netflix, Amazon, and TiVo are selections of theMotley Fool Stock Advisor newsletter service.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002.He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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