Netflix trims outlook and shares sink

NEW YORK (Reuters) - Online DVD rental company Netflix Inc cut its fourth-quarter outlook, blaming the U.S. economic turmoil for weaker-than-expected subscriber growth in the third quarter and driving its shares down 11 percent.

The news surprised analysts who had thought Netflix would be relatively insulated from the weak economy as U.S. consumers were expected to continue to watch videos even as they cut back on other spending.

Netflix competes primarily with Blockbuster Inc but also faces challenges from online video providers such as Apple Inc and Amazon.com Inc.

The company lowered its forecasts for fourth quarter revenue and subscriber growth, which overshadowed its slightly higher earnings-per-share estimate for the quarter.

"We see this as an incremental negative for the bull-case on Netflix shares, which contends that the company is relatively insulated from a slowdown in the broader economy, since DVD-by-mail consumption should at least hold up, if not increase, as cash-strapped consumers increasingly stay home," J.P. Morgan analyst Barton Crockett wrote in a research note.

Netflix shares fell as much as $3.78, or 13 percent, to $25.19 before recovering to close at $26.49.

Chief Financial Officer Barry McCarthy said in a statement that while Netflix's net subscriber growth in July was within expectations, August was unusually weak.

"In September, the business regained momentum with results slightly below original expectations, likely due to the economic climate," McCarthy said.

Netflix ended the third quarter with approximately 8.672 million subscribers, just below the low end of its previous guidance of 8.675 million to 8.875 million subscribers.

Otherwise, Netflix said income and revenue should be within its previous guidance for the third quarter. The company is scheduled to report results on October 20.

For the fourth quarter, Netflix now sees revenue at between $353 million to $359 million, down from the prior estimate of $357 million to $367 million. Analysts on average were looking for revenue of $361 million, according to Reuters Estimates.

Netflix forecast subscribers to total 8.95 million to 9.25 million in the fourth quarter, down from its previous estimate of 9.1 million to 9.7 million.

It expected fourth-quarter earnings to be between 30 cents and 38 cents a share, up slightly from the 29 cents to 37 cents previously forecast.

Crockett noted that one possible reason for the pullback in subscriber growth is that Netflix is competing against "exceptional strength" in the year-earlier period, when key rival Blockbuster stopped promoting a competing service.

"We remain cautious in the face of toughening comps, and also believe this morning's announcement raises the question whether the DVD-by-mail business is nearing maturity.

Analysts said Blockbuster would fare better.

"Blockbuster may be slightly more immune than Netflix in an environment where people are assessing monthly expenses," said Stacey Widlitz, analyst with Pali Research.

"It's better to offer products in various ways if people are pulling back on subscriptions," said Arvind Bhatia, analyst with Stern Agee.

Blockbuster in August warned the Olympics and a weak film slate may crimp third quarter revenues but raised its 2008 outlook, forecasting $300 million to $315 million in earnings before interest, taxes, depreciation and amortization, which corresponds to net income of $21 million to $36 million.

Blockbuster's stock closed down 1 percent or 2 cents at $1.96 on the New York Stock Exchange.

(Additional reporting by Sue Zeidler in Los Angeles; Editing by Derek Caney, Dave Zimmerman, Phil Berlowitz)