Netflix Says Net Income Doubles

Netflix Inc. said Monday that its fourth-quarter profit more than doubled but warned that it expected to lose $5 million to $15 million in 2005 as the battle with rival online video rental services heated up.

The Los Gatos, Calif.-based company earned $4.8 million, or 8 cents a share, in the quarter, compared with $2.3 million, or 4 cents a share, a year earlier.

The results, slightly better than Wall Street estimates, came as revenue grew 77% to $143.9 million.

But Chief Executive Reed Hastings acknowledged that Netflix was having to spend substantially more money on marketing to sign up customers as it competed with Blockbuster Inc. and Wal-Mart Stores Inc. and prepared for the possible entry by online retail giant Amazon.com. As a result, the company expects to lose $16 million to $19 million in the first quarter but make money later in the year.

Hastings acknowledged that the company had underestimated competition, especially from Blockbuster, but promised that Netflix was now prepared.

“Blockbuster has thrown everything at us but the kitchen sink and we have continued to grow steadily,” Hastings said.

Faced with the new competition from Blockbuster, Netflix in November cut its subscription price to $17.99 a month from $21.99.

So far, Netflix has refused to match Blockbuster’s latest price cut, to $14.99.

If Blockbuster decides to lower the price again, however, Netflix would have to contemplate dropping its price, which would cut deep into its bottom line, Hastings said.

Analyst Michael Pachter of Wedbush Morgan Securities warned that Netflix executives could be in for a hard time with Blockbuster shadowing the company’s every move and undercutting its price.

“Their optimism is based upon the premise that people who are not currently subscribers of either Blockbuster or Netflix will sign up for Netflix and pay more money,” Pachter said. “Blockbuster is going to emulate every single [idea] that works. At the end of the day people are price sensitive.”

Still, Netflix said it expanded its subscriber base to 2.6 million last year, adding 381,000 subscribers in the final quarter. The company aims to reach about 4 million by the end of this year.

In another positive sign for Netflix, fewer customers are canceling the service. The firm said its customer churn rate was 4.4% last quarter, the lowest since the service started five years ago.

Netflix shares rose 10 cents to $11.14 on Nasdaq, then jumped to $12.80 in after-hours trading, after the earnings report. The stock reached $38 last year.