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Amazon, Netflix earnings soar

Customer growth helps both companies scoop up higher sales and earnings in the third quarter, despite the recession. Amazon's stock is up 25 percent on Friday as a result.

You wouldn't know there's been a slowdown in consumer spending by looking at Amazon.com and Netflix.

Both companies have continued to grab customers at a record pace, leading to higher earnings and sales for their third quarters.

Net income for Amazon jumped 68 percent to $199 million, or 45 cents a share, in the quarter that ended September 30, compared with $118 million, or 27 cents a share, in the prior year's quarter.

Sales rose 28 percent to $5.45 billion versus $4.26 billion in 2008's third quarter, the company said Thursday.

Amazon's stock shot up $23.75, or 25 percent, to $117.29 in Friday trading.

Amazon's two-year stock chart. Yahoo Finance

Amazon attributed its earnings to several key factors.

Chief Financial Officer Tom Szkutak said Thursday in a conference call with reporters that consumers continue to spend at Amazon because of its low prices and large selection. The company noted that it had 98 million customer accounts by the end of the third quarter, 17 percent higher than a year ago.

Worldwide sales from books, CDs, DVDs, and other media grew 17 percent to $2.93 billion, while revenue for electronics and other general merchandise soared 44 percent to $2.36 billion.

Another solid driver for growth was the Amazon e-book reader, Kindle.

"Kindle has become the No. 1 bestselling item by both unit sales and dollars--not just in our electronics store but across all product categories on Amazon.com," Amazon CEO Jeff Bezos said in a statement. The company did not release specific sales figures for the Kindle.

Amazon managed to clobber analysts' expectations. J.P. Morgan had forecast earnings per share of 31 cents on sales of $5 billion. Broadpoint.Gleacher analyst Ben Schachter had been eyeing earnings per share of 33 cents and said that sales were 7 percent higher than he expected.

In a report, J.P. Morgan said Amazon's strong sales growth shows that the company is grabbing significant market share from other e-commerce players, such as eBay.

In his report, Schachter called the results "phenomenal." He noted that Amazon was able to keep its costs in check while gaining market share in virtually every product category. The analyst also said he was "shocked" to hear Bezos' statement that the Kindle has become the company's top-selling item.

For the current quarter, Amazon is looking for sales of $8.13 billion to $9.13 billion, 21 to 36 percent higher than last year's fourth quarter, and racing past analysts' estimates of $8.11 billion.

Collins Stewart analyst Sandeep Aggarwal said in a report that improving e-commerce trends and continued growth for the Kindle, among other factors, could make Amazon the fastest growing large-cap Internet stock.

Another beneficiary of solid customer growth, Netflix also surpassed analysts' expectations for the third quarter.

The company's earnings jumped 48 percent to $30.1 million, or 52 cents a share, versus $20.4 million, or 33 cents a share in the prior year's quarter. Sales grew 24 percent to $423.1 million, compared with $341.3 million in 2008's third quarter.

Overall, analysts had been expecting earnings of 46 cents per share on sales of $420 million.

Growth in subscribers was the key driver for Netflix in the third quarter. The company ended the quarter with around 11.11 million subscribers, a 28 percent jump from the 8.67 million subscribers at the end of 2008's third quarter. Of the current total, 98 percent, or 10.84 million, were paid subscribers, while the remaining 2 percent were free subscribers.

"Our business momentum is strong and our third quarter performance keeps us solidly on course for a record 2009," Netflix co-founder and Chief Executive Officer Reed Hastings, said in a statement.

Though most Netflix customers still prefer to get their movies by conventional mail, Internet streaming has gradually taken off. In the third quarter, 42 percent of Netflix subscribers streamed at least 15 minutes of video, compared with only 22 percent in the prior year's quarter.

Customers can stream their Netflix picks not just through the PC but via gadgets like Microsoft's Xbox 360, which has helped attract new customers.

Now Netflix has reportedly struck a deal to add streaming to another device, which Hastings said is already in people's homes. Though the company has been mum about details, analysts believe it may be a video game console made by either Sony or Nintendo.

Netflix shares were up $4.58, or 9 percent, to $54.22 on Friday.

For the fourth quarter, the company believes customer growth and sales will be higher than anticipated three months ago. Netflix now expects to end the current quarter with 12 million to 12.3 million subscribers, up from the prior estimate of 11.6 million to 12 million. That would represent an additional 900,000 to 1.2 million customers.

Fourth-quarter sales are likely to reach $440 million to $446 million, up from the previous estimate of $431 million to $445 million.

However, the company forecasts a downturn in earnings from the third quarter, eyeing fourth-quarter net income of $21 million to $26 million, or 38 cents to 47 cents a share.

Expenses may be one factor affecting current earnings. Hastings said the company expects to spend more on marketing and licensing fees for Internet streaming. Netflix also believes its postal costs will continue to grow, surpassing $600 million next year and $700 million in 2011.