Netflix reports first drop in subscriptions

LOS ANGELES Mon Jul 23, 2007 7:50pm EDT

People watch a film in this December 8, 2003 file photo. Netflix Inc., the largest online DVD rental company, on Monday reported its first-ever quarterly drop in subscriptions and cut forecasts for subscribers, revenue and profit for the year in the face of fierce competition from Blockbuster Inc. REUTERS/Netflix/Ray Stubblebine

People watch a film in this December 8, 2003 file photo. Netflix Inc., the largest online DVD rental company, on Monday reported its first-ever quarterly drop in subscriptions and cut forecasts for subscribers, revenue and profit for the year in the face of fierce competition from Blockbuster Inc.

Credit: Reuters/Netflix/Ray Stubblebine

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LOS ANGELES (Reuters) - Netflix Inc. (NFLX.O), the largest online DVD rental company, on Monday reported its first-ever quarterly drop in subscriptions and cut forecasts for subscribers, revenue and profit for the year in the face of fierce competition from Blockbuster Inc. BBI.N

Shares fell 4 percent in extended trading. The stock had already closed the regular trading session 12 percent lower after the company cut prices on two of its subscription plans.

Chief Financial Officer Barry McCarthy told analysts on a conference call that Wall Street estimates for fiscal 2008 earnings growth were "excessively optimistic."

"When Blockbuster decides to operate its online business profitably, our financial results will improve also, but until that time both subscriber growth and earnings will remain under pressure," McCarthy said.

Netflix has spent the last six months fending off a rising challenge from Blockbuster, which said it will spend $170 million this year to promote its Total Access plan. That allows subscribers to swap DVDs rented online at its stores for free and has become a powerful competitor to Netflix.

On Sunday, Netflix cut prices for two of its most popular monthly rental plans by $1 each, to $16.99 and $8.99, to bring them in line with Blockbuster's online-only rental plan. It previously had cut two other plans by $1 each.

The Los Gatos, California-based company, which pioneered online DVD rentals and controls two-thirds of the market, said its net subscriber base dropped to 6.74 million from 6.8 million in the first quarter.

Despite the raft of bad news, Netflix beat Street profit projections by a wide margin, and Chief Executive Officer Reed Hastings said the company expects to sign up more subscribers in the back half of the year "even if there is no change in competitive landscape."

Hastings said the downward revisions of Netflix's forecasts reflected a worst-case scenario that Blockbuster would continue to run its online business at a loss.

WAITING IT OUT

"They are responding in ways that make sense, ways that arguably are the best way to try and protect shareholder value, but that doesn't mean shareholder value will go up," said JP Morgan analyst Barton Crockett, who has an "underweight" rating on Netflix.

Net income for the second quarter was $25.6 million, or 37 cents per share, compared with $17 million, or 25 cents per share, a year earlier, boosted in part by a $4.1 million settlement of a patent dispute.

Excluding some items, Netflix earned 31 cents per share, compared with the Wall Street target of 25 cents per share, according to Reuters Estimates.

Revenue rose 27 percent to $303.7 million, from $239.4 million in last year's second quarter but finished behind analysts' average expectation of $307.8 million.

Wedbush Morgan Michael Pachter, who has a "sell" rating on Netflix, said the company appeared to have cut marketing spending.

"If they don't spend money on marketing they are delusional if they think it's going to attract millions of subscribers," Pachter said.

Netflix now expects to end the year with 6.8 million to 7.3 million subscribers, down from a previous forecast of 7.3 million to 7.8 million. It dropped its revenue expectation to between $1.17 billion to $1.19 billion from $1.21 billion to $1.26 billion, and reduced its net income outlook to 62 cents to 76 cents per share from 76 cents to 83 cents per share.

Shares of Netflix fell to $16.60 in extended trading after closing down $2.36, or 12 percent, at $17.27 in regular trading Monday on Nasdaq.

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