I must admit, I was a bit skeptical at first. Renting movies over the Internet made me feel like George Jetson. When I joined Netflix
Now, people have gotten on board, and the company's customer list keeps expanding at a healthy clip. But with rapid growth comes the lofty cost to acquire new users.
Netflix appears to have paid a steep price for its 90% revenue growth in its second quarter. The company reported net earnings of $0.11 per share, $0.02 below analysts' expectations. Netflix's subscriber acquisition cost was $35.12 per new trial subscriber in the second quarter, and it expects the number to rise to $37 to $39 in the third quarter (including the cost of increased television advertising). The name of the game in the movie rental business is customer addition and retention, and the company expects its churn rate (the percentage of customers who do not renew subscriptions) in the third quarter to be between 4.8% and 5.6% (it was 5.6% in second quarter). The bottom line is that the company is adding many more subscribers than it is losing each month.
The online movie wizard also tightened its estimates for 2004 by forecasting revenue of $511 million to $525 million (from a previous estimated range of $484 million to $535 million) and net income of $12.6 million to $22.1 million (from $10.5 million to $18.5 million). So, what should investors take from the company's earnings release? Basically, customer growth has its price.
Every successful online business has gone through rough periods of growing pains. Amazon.com
Given the choice of investing between Netflix and the top three movie rental chains -- Blockbuster
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Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.