Netflix investors seek clarity amid stumbles

LOS ANGELES Thu Oct 20, 2011 2:33pm EDT

The headquarters of Netflix is shown in Los Gatos, California September 20, 2011.  REUTERS/Robert Galbraith

The headquarters of Netflix is shown in Los Gatos, California September 20, 2011.

Credit: Reuters/Robert Galbraith

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LOS ANGELES (Reuters) - One-time Wall Street superstar Netflix Inc will have some explaining to do when it reports quarterly results on Monday.

After a summer of stumbles -- starting with a highly unpopular decision to raise prices that sent customers running to rival services -- investors want to see both clarity from the company on the damage and signs that it can return to its once-rapid growth.

Netflix shares have tumbled 63 percent since July as the Street watched the unfolding drama, which included a 60 percent price increase for some customers, failure to secure key movie content from Starz and a semi-apology and admission of "arrogance" from Chief Executive Officer Reed Hastings. A shocking decision to spin off the DVD-by-mail service into a company called Qwikster, and a speedy retreat from that widely panned idea, served as the climax.

A stunned Netflix went from media disruption marvel to the butt of jokes on "Saturday Night Live" in the space of a few months as a result of the missteps.

"Between lower-than-anticipated (subscriber) growth and the reversal of the decision to completely separate the DVD streaming business, these are clearly trying times for Netflix," said Dougherty & Co analyst Steve Frankel. "The near term is clouded by higher than anticipated churn, a situation which is likely to negatively impact the fourth quarter as well."

Coming from nowhere nearly 15 years ago to shake up the media and cable industries with its simple but devastatingly effective DVD-by-mail service, Netflix now is trying to regain its footing by emphasizing online streaming of movies and TV shows.

Netflix executives say the price increase, while it could have been explained better, will help pay for more content to improve the streaming service for customers over the long term. Still, the move has caused significant short-term pain. Netflix has already slashed its U.S. subscriber forecast for the quarter that ended in September by 1 million, to 24 million in total.

Hastings, in an interview with The New York Times published on Thursday, said the backlash over Qwikster had caused "internal reflectiveness," adding that "we know that we need to do better going forward." But he urged a long-term view of the company he co-founded, made profitable starting in 2002 and built up to more than 25 million subscribers.

"This is the first time there have been material missteps. If you look at the cumulative track record, it's extremely positive," Hastings said.

Analysts said they expect the company to hit its lowered subscriber estimate. Third-quarter revenue should come to $801.53 million and earnings per share to 94 cents, according to Thomson Reuters I/B/E/S.

Focus will shift to predictions for the fourth quarter and the important holiday shopping period, said Barclays Capital analyst Anthony DiClemente.

"Typically the fourth quarter is pretty strong for Netflix," DiClemente said. Right now, "it's tough to predict given the volatility in subscribers we've seen," he said.

Netflix's woes couldn't have come at a worse time. Rival services from Dish Network Corp's Blockbuster, Amazon.com Inc and others are ramping up their own offerings by buying up content and hooking up with media partners to take on Netflix.

"A year or two ago, Netflix was very unique in its offering. Now there are ... alternatives in the market," said Cowen and Co analyst Jim Friedland.

At the same time, the company faces the loss of newer movies from Liberty Media Corp's cable channel Starz in February and is writing bigger checks for new content. Some analysts wonder where Netflix will turn to add quality movies and television shows.

Netflix is "still going to be challenged to get enough compelling content to grow the subscriber base," Morningstar analyst Michael Corty said.

The company points to deals signed in recent weeks with CBS Corp's and Time Warner Inc's CW television network, Lions Gate Entertainment Corp, AMC Networks Inc and others as evidence of its expanding online streaming library.

Some analysts said Hastings' long-term vision remains intact and his stumbles were more a matter of timing than any flaw in fundamental strategy.

Optimists point to Netflix's just-now-accelerating international expansion, with markets in Europe expected next; to a content library still far ahead of Hulu or Blockbuster; and to still-enormous cash flows and healthy bottom line.

"Netflix is a riddle wrapped up in an enigma," said Wedbush Securities analyst Michael Pachter. "The company will right itself, but expect some more pain along the way."

(Reporting by Lisa Richwine and Edwin Chan; Editing by Peter Lauria and Gerald E. McCormick)

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