Netflix shares down after outlook disappoints

LOS ANGELES/NEW YORK Mon Jul 25, 2011 7:35pm EDT

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LOS ANGELES/NEW YORK (Reuters) - Netflix Inc, facing a backlash from customers upset over a price hike, warned its subscriber growth would cool down in the third quarter, and its shares fell 10 percent.

The movie rental company, whose stock is up 850 percent since early 2009, set off alarm bells on Monday when it said customer defections would take a bite out of its subscriber count.

Netflix will essentially end the third quarter with the same number, or only slightly more, subscribers as it had at the end of the second quarter. For investors accustomed to spectacular growth, the forecast represented a bitter pill and made clear that customers are sufficiently upset over a recent change to cancel the service.

Those cancellations will largely offset any new subscriber additions in the third quarter, and pressure financial results. Netflix forecast earnings and revenue for the third quarter that would come up short of current analyst estimates.

And that is on top of a second quarter revenue figure that looked light to analysts.

Netflix "came into the quarter as Superman and it looks like they ran into a little bit of kryptonite and lost some of their super power," said Barton Crockett, an analyst with Lazard Capital Markets.

The company forecast third-quarter revenue of between $780 million to $805 million in the United States compared with an average analyst estimate of $846.5 million, according to Thomson Reuters I/B/E/S. It is expecting global earnings of 72 cents a share to $1.07 a share, which is also below the current analyst estimate of $1.09 a share.

Netflix shares fell about 10 percent to $253 after closing at $281.53 in the regular session on Nasdaq, wrongfooting options traders who were betting that the stock would keep chugging higher, and bringing some welcome relief to short sellers.

"It's too early to call on Netflix's future at this point. I have a 'sell' rating on the company based on its high valuation, but I'm not shorting it because it's still a great company," said Brett Harriss, analyst at Gabelli & Co. "There's just not enough margin of safety to buy it here."

NO FLAWS ALLOWED

Previously, Netflix wowed Wall Street with big subscriber additions quarter after quarter, and investors piled in. The company trades at 61 times this year's earnings estimates, a valuation that brings high investor expectations.

While "the business is still healthy," the company's results must be "flawless to support a stock" at those levels, analyst Crockett said.

Netflix sparked a backlash earlier this month when it announced it was raising prices as much as 60 percent for plans that provide DVD rentals and online streaming of movies and television shows. Thousands of subscribers complained on the Netflix blog and Facebook page with many threatening to cancel their subscriptions.

In a letter to shareholders, Netflix said: "We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we're working hard to further improve the quality and range of our streaming content."

By the end of the third quarter, it estimates it will have about 25 million total U.S. subscribers. That is barely more than the 24.59 million it now has.

The company said it expected customer growth to return in the fourth quarter. With the full impact of the price hike, the fourth quarter also could be "our first billion dollar global revenue quarter, driven by strong U.S. performance," the company said.

For the second quarter, the company's revenue rose 52 percent to $788.6 million, but fell short of the average analyst estimate of $791.5 million, according to Thomson Reuters I/B/E/S.

Second-quarter earnings surpassed expectations in rising to $68 million, or $1.26 a share, from $44 million, or 80 cents a share, in the period a year ago.

(Additional reporting by Yinka Adegoke and Jennifer Saba in New York; Editing by Gary Hill and Carol Bishopric)

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