October 23, 2012, 5:18 PM

Netflix grows revenue and its streaming business in the third quarter

But the cost of licensing movies and TV shows could produce a Q4 loss.

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Revenue, the number of new subscribers and the amount of revenue from streaming digital entertainment all trended higher for Netflix Inc. in the third quarter. But Netflix is also spending heavily to grow those top-line metrics and increased profits only nominally in the third quarter. What’s more, the e-retailer is already warning the company could end the year with a loss.

For the third quarter ended Sept. 30, Netflix, No. 9 in the 2012 Internet Retailer Top 500 reported:

  • Revenue grew by 1.8% to $905.1 million from $889.3 million in the third quarter of 2011.
  • Net income grew year over year 24.2% to $7.7 million from $6.2 million.
  • Total subscribers, including domestic and international, increased 25.7% to 31.8 million from 25.3 million in the third quarter of 2011.
  • Total U.S subscribers increased 15.5% to 27.5 million from 23.8 million in the third quarter of 2011.
  • International subscribers grew year over year 186.7% to 4.3 million from 1.5 million.

Netflix, which continues to add new overseas markets such as Denmark, Finland, Norway and Sweden, is spending heavily to grow its digital streaming business and its cadre of entertainment content providers, says CEO Reed Hastings. “While we are not growing membership as fast as in 2010, we think that over time nearly all U.S. households will be broadband households, nearly all video will be Internet video, and that as our content and member experience continue to improve faster than competitors, our long-term domestic market opportunity remains two to three times that of linear HBO,” Hastings says.

Netflix increased its U.S. base of digital entertainment streaming customers by 17.3% to 25.1 million from 21.4 million. But the company is spending heavily and as a result posted a big a drop in profits for the first nine months of the year.

 For the first three quarters:

  • Revenue increased year over year 14.7% to $2.66 billion from $2.32 billion.
  • Net income declined year over year 95.1% to $9.3 million from $190.9 million.

“Our movement into original programming will require more up-front cash payments than our typical content licensing agreements, beginning in Q4 and increasing in 2013,” Hastings says.

For the fourth quarter Netflix projects net income could total $2 million or a loss of up to $13 million. The company didn’t give guidance on total revenue but expected domestic paid streaming revenue to range from $581 million to $588 million, international streaming from $90 million to $100 million and domestic DVD subscriber revenue to range from $248 million to $255 million.

“We believe Internet TV will grow for the next few decades and that some firms will build extremely valuable businesses providing consumers an incredible, personalized Internet TV experience,” Hasting says. “Internet TV is the future of television and we are leading the change.”

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