UPDATE 3-Netflix revenue lags Street expectations

Wed Jul 21, 2010 8:55pm EDT

* Netflix Q2 shr 80 cts vs 54 cts year earlier

* Netflix Q2 revenue $519.8 mln vs $408.5 mln

* Netflix ends Q2 with 15 million subscribers

* Shares fall more than 9 percent after hours (Adds conference call details)

By Sue Zeidler

LOS ANGELES, July 21 (Reuters) - Netflix Inc's (NFLX.O) second-quarter revenue missed Wall Street's expectations as many new subscribers signed up for lower-priced plans that offer unlimited streaming, and the company's shares fell more than 9 percent after hours.

While revenue fell short of forecasts, the Web video subscription service's earnings jumped 34 percent on improved margins as customers opted to stream movies and TV shows rather than order discs via mail, helping to drive down costs.

But the rate of subscriber growth also disappointed some. Netflix ended the quarter with 15 million subscribers, up 42 percent from 10.6 million a year ago. The quarterly total was at the top of Netflix's own projected range for the quarter, but analysts had hoped it would blow past it.

"For the last two quarters, the acceleration of our growth has been astounding, driven by the increasing appeal of streaming. This kind of rapid acceleration is unlikely to continue for long, but as our guidance for the third quarter implies, we do see it continuing in the third quarter," Netflix Chief Executive Reed Hastings said in a statement.

Netflix's various deals to offer its streaming service through consumer electronic devices has paid off handsomely, and on Wednesday, Hastings said the recent introduction of Apple Inc's (AAPL.O) iPad has been a "big success" in terms of attracting new subscribers.

He said he also expects continued "substantial growth" from game consoles like Nintendo Co Ltd's 7974.OS Wii, Microsoft Corp's (MSFT.O) Xbox and Sony Corp's (6758.T) (SNE.N) PlayStation 3.

Netflix expects to end the third quarter with 16.3 million to 16.7 million subscribers, and the year with 17.7 million to 18.5 million subscribers.

Second-quarter revenue rose to $519.8 million from $408.5 million. Analysts on average had forecast earnings of 70 cents on revenue of $524.4 million, according to Thomson Reuters I/B/E/S.

Netflix reported second-quarter net income of $43.5 million, or 80 cents per share, up from $32.4 million, or 54 cents per share, a year ago.

EXPECTATIONS HAVE BEEN AMPED UP

"Some people are disappointed about the revenue and that there was not as much subscriber growth as some might have hoped. The subscriber levels only hit the high end of guidance and expectations have been amped up," said Barton Crockett, analyst with Lazard Capital Markets.

The company's stock fell 9.3 percent to $108.51 in extended trading after closing at $119.68 on Nasdaq. The 52-week range is $39.27 to $127.96.

Year-to-date, the share price has risen by 118 percent and is trading at a price-to-earnings ratio of 53.83.

Analysts attribute much of the share price rise to the growing subscriber base and enthusiasm for the Internet streaming service market. But Wall Street is beginning to question when these near-term positives will give way to heightened competition and content cost inflation.

"The stock is priced for perfection when you're trading at that kind of multiple. My belief is that there will be growing competitive pressures," said Tony Wible, an analyst with Janney Montgomery Scott.

"While Netflix enjoys the lead in Internet streaming, the barriers to entry are lower than ever, which will lead to more competition like Hulu Plus and an expected streaming service from Coinstar's CSTR.O Redbox," Scott said.

On the call, Hastings said he considered the new Hulu subscription offering to be a "potential signficant competitor." (Reporting by Susan Zeidler; Editing by Richard Chang)

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