Netflix warns of more cancellations, shares drop

Mon Oct 24, 2011 7:42pm EDT

A screen grab shows the access to Netflix online, as displayed on a television screen, in Encinitas, California July 25, 2011.  REUTERS/Mike Blake

A screen grab shows the access to Netflix online, as displayed on a television screen, in Encinitas, California July 25, 2011.

Credit: Reuters/Mike Blake

(Reuters) - Netflix Inc lost more customers than it anticipated in the third quarter and warned of still more defections to come, pushing its shares down 27 percent as the one-time Wall Street star grapples with the fallout from a price increase and other unpopular moves.

The top video rental company reported a better-than-expected 49 percent surge in third-quarter revenue to $822 million, surpassing Wall Street's target of about $812 million. It also beat expectations on earnings per share.

But investors -- mindful of how the company led by CEO Reed Hastings had driven away customers in recent months and damaged its credibility with a price rise and other high-profile stumbles -- focused on the fourth-quarter warning.

Netflix shares plummeted 27 percent to $86.70 in after-hours trading, about 70 percent below the high of just under $300 per share in July.

"The reason the stock is getting crushed is the trends just continue to deteriorate," Janney Montgomery Scott analyst Tony Wible said.

Netflix said it had lost more than 800,000 U.S. subscribers in the third quarter, more than the about 600,000 it had forecast in September. Total U.S. subscribers stood at 23.8 million.

Looking forward, the company said DVD subscriptions will "decline sharply this quarter" but total U.S. subscribers, which includes customers who pay for its online streaming service, will be "slightly up."

Netflix has been writing big checks to expand its streaming content so it can attract new subscribers and return to the red-hot growth it was once famous for. In 2012, content spending will "nearly double" from this year, the company said.

Netflix also forecast a loss for the first quarter of 2012 as it expands into Europe.

"We expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development," Hastings said in a letter to shareholders accompanying its quarterly report.

Hastings added that subscriber defections because of the price-rise should slow in coming quarters "as the price effect washes through." The company said it would return to profitability by increasing its global streaming subscriber base faster than costs rise. It also plans to raise its streaming margin by 1 percent every quarter.

The company reported earnings per share of $1.16 on net income of $62 million. Analysts had expected earnings per share of 94 cents, according to Thomson Reuters I/B/E/S.

Still, those assurances failed to satisfy investors the company was getting back on track.

"The subscriber numbers were disappointing. It looks like they see very weak subscriber numbers in the fourth quarter," said Lazard Capital Markets analyst Barton Crockett.

For the fourth quarter, Netflix forecast earnings per share of between 36 cents and 70 cents and revenue of $841 million to $875 million.

"The guidance is well below what people were expecting. I think they are hitting the reset button here ... to set a bar for themselves going forward that they can achieve," Piper Jaffray analyst Michael Olson said.

The company that shook up Hollywood with its DVD-by-mail service is trying to recover from the roughest patch in its nearly 15-year history as it moves to emphasize online streaming of television and movies.

The shares have plummeted since July, when Hastings announced a price rise for subscribers who wanted both DVDs and streaming. A wave of cancellations hit the company that had been famous for red-hot growth and loyal customers.

Hastings apologized for not explaining his decision well and admitted to "arrogance," but instead of soothing concerns he set off a new wave of complaints with a plan to put the DVD service on a separate website called Qwikster. He quickly dropped the widely panned idea.

As Netflix stumbles, rivals such as Dish Network Corp's Blockbuster, Inc and Wal-Mart Stores Inc's Vudu are ramping up their online entertainment offerings to better compete with Netflix.

In the letter to shareholders, Netflix said it was "moving forward as quickly as we can to repair our reputation and return to growth."

(Reporting by Lisa Richwine; editing by Bernard Orr and Andre Grenon)

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Comments (15)
Swiftright wrote:
LOL Im glad they think that their customer hemorrhage will slow down to a mere bleed by early next year. Heck maybe by 2013 they might stop seeing negative growth.

Hastings hubris is astounding, even for a American corp exec. I could almost deal with the massive price increase, the huge reduction in services would have made me leave for a couple of years, but it was that arrogant pricks “screw off” attitude and “Deal with it” blog that drove me away for good.

RIP Netflix as I say hello to the many competitors I never even knew existed a few months ago!

Oct 24, 2011 5:51pm EDT  --  Report as abuse
Buelligan wrote:
So rather than try to right his wrongs, Hastings is basically saying to weather the storm and deal with how things come out on the other end? Sounds like he doesn’t want to inspire confidence amongst his investors. Makes sense since he doesn’t want to create satisfaction for his customers.

Oct 24, 2011 6:03pm EDT  --  Report as abuse
I cancelled my Netflix subscription way before the price increases. The fact of the matter is, they marketed their product as a streaming service, but not much of what I wanted to see was available for streaming. In effect, they are a mail order Blockbuster. With Blockbuster, I could get the product the same day, but with Netflix I have to wait days. Pain, but no gain. When/if they go full streaming, I’ll reconsider.

Oct 24, 2011 6:34pm EDT  --  Report as abuse
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