April 18, 2003, 12:00 AM

Better fulfillment system boosts Netflix`s Q1 revenue

Netflix Inc. is keeping more customers and showing a sharp increase in revenue for the first quarter ended March 31, the online DVD-rental company says.

Thanks to an improved fulfillment service, Netflix Inc. is keeping more customers and showing a sharp increase in revenue for the first quarter ended March 31, the online DVD-rental company says. NetFlix reports that Q1 revenue hit $55.7 million, up 82% from the year-earlier period.

"Our strategic focus on improving the Netflix user experience, which produced record low churn, has created a better business model," CEO and founder Reed Hastings says. He adds that the lower churn, or loss of customers who don`t continue to subscribe to the Netflix DVD mailing service, affected both paid and free-trial subscribers.

Netflix attributes the lower customer churn--5.8% for Q1, down from 7.2% a year ago--to new fulfillment software and other operational improvements, including the launch of five additional metropolitan shipping centers, that enable faster delivery of DVDs. For $19.95 per month, subscribers can receive up to four DVDs at any one time, keeping them for as long as they want. As each DVD is returned, another is sent from a list pre-selected by the subscriber from among the Netflix library of more than 14,000 movies on DVD.

The faster deliveries, however, have resulted in increased disc usage among customers and lower gross profit margins. The company said its gross margin for Q1 was 46.1%, down from 48.2% a year ago.

In the long run, Netflix figures it will come out ahead financially, even with the lower margins, as customers subscribe for longer periods. It said it ended the first quarter with about 1.05 million subscribers, 96% of them paid, representing a 74% increase in total subscribers from a year ago.

The company reported a net loss for Q1 of $4.5 million, unchanged from a year ago.

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