Taking a cue from eBay (NASDAQ:EBAY), DVD rental service Netflix (NASDAQ:NFLX) has some aggressive long-term goals. By 2007 to 2009, the company aims to reach $1 billion in annual revenue, 5 million subscribers, and $100 million to $200 million in annual free cash flow. That's a long way to go, but the second quarter was a step in the right direction.
Revenue for the quarter leapt 74% to $63 million. Netflix signed on 327,000 new trial subscribers -- 71% more than last year -- driving total subs to 1.14 million. Average monthly subscriber churn dropped to 5.6% from 6.7%, low enough to make the AOL (NYSE:AOL) of yesteryear blush.
Excluding stock-based compensation, the quarter's $5 million in net income, or $0.16 per share, topped expectations. On a generally accepted accounting principles (GAAP) basis, net income totaled $3.3 million, or $0.11 per share. Non-GAAP free cash flow came in at $4.3 million, or 7% of revenue, down from previous quarters. Why?
In the conference call, management explained that DVD purchases were intentionally high, as Netflix bought up to 60% of all new DVDs in its inventory. Traditionally, the company has leased up to 65% of its DVDs (on which it must then share any rental revenue). DVD purchase rates will decline in coming quarters, but marketing costs will rise.
Not unlike a young Amazon.com (NASDAQ:AMZN), Netflix paid about $30 to acquire each new subscriber. This could rise to as much as $35 per new member later this year, while the company tests new marketing concepts. Fortunately, again like a young Amazon, competition from the likes of Wal-Mart (NYSE:WMT) seems to be helping Netflix: The battle is actually boosting membership as the spectacle essentially serves as free advertising.
Gross margins have fluctuated as Netflix has grown, as did Amazon's; nonetheless, management raised its non-GAAP profit guidance for 2003 by about 20%, and upped the range of its revenue guidance. The company expects to close 2003 with more than 1.4 million subscribers, non-GAAP net income of $6 million to $11 million and as much as $270 million in sales.
Expectations were high to be sure -- which likely explains this morning's sell-off. On the whole, though, a pretty solid report.
Netflix has outperformed the S&P 500 since being selected by David Gardner in Motley Fool Stock Advisor, a newsletter that offers two stock picks a month.Stock Advisorwas rated the No. 1 stock newsletter performer in the last year by Hulbert Digest.
