Netflix cautious on subscriber growth, shares plunge

LOS ANGELES Tue Jul 24, 2012 9:24pm EDT

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

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

Credit: Reuters/Mike Blake/Files

Related Topics

LOS ANGELES (Reuters) - Netflix Inc (NFLX.O) warned on Tuesday it may have trouble reaching its year-end target for new subscribers, an outlook that disappointed Wall Street and sent the video rental company's shares down nearly 16 percent.

For the second quarter, Netflix returned to profit and reported earnings of 11 cents a share, beating analysts' expectations of 5 cents. Its $8-a-month TV and movie streaming service added 530,000 new U.S. customers.

But the company, whose red-hot growth had once made it a Wall Street darling, said the Olympic games would compete for consumers' time and likely hurt its ability to sign new customers this quarter, when it expects to add 1 million to 1.8 million subscribers.

If Netflix misses the top of that range, it will be "challenging" to reach the company's goal of 7 million new U.S. streaming subscribers for all of 2012, CEO Reed Hastings and CFO David Wells said in a quarterly letter to shareholders.

Netflix also said it would lose money in the fourth quarter when it launches in another international market. It currently has operations in Canada, Latin America and Great Britain.

The uncertainty about subscriber growth rattled investors, Wall Street analysts said. Netflix shares dropped 15.8 percent to $67.70 in after-hours trading from their $80.39 close on Nasdaq.

"There's some waffling around the streaming guidance domestically for the year," Dougherty & Co analyst Steve Frankel said, explaining the share decline.

A year ago, Netflix posted earnings of $1.26 a share for the quarter, which ended just before its controversial decision to raise prices and charge separately for its streaming and mail service prompted a wave of cancellations. The company watched its shares plunge from a high of $304.79 in July 2011 to $62.37 the following November.

Netflix earned $6 million in the second quarter as its U.S. operation offset a foreign expansion that saddled the company with a $89 million loss. Revenue rose to $889 million, up 12 percent from a year earlier.

"We have enormous challenges ahead and no doubt will have further ups and downs as we pioneer Internet television," Hastings and Wells said in their letter. But they added: "We are making progress in every market we serve."

Hastings said the company would stick with its strategy of incurring losses by investing in new markets and then waiting for the company to become profitable again before taking another temporary loss to expand further.

"Our view is there is a once-in-a-generation opportunity to get in early and to build a substantial markets," Hastings said in an interview.

Netflix needs to keep growing to pay the $1.2 billion in commitments to Walt Disney Co (DIS.N), Warner Bros (TWX.N), CBS Corp (CBS.N) and others to stream their movies and TV shows. At the same time, it faces emerging competition from websites such as Amazon.com Inc (AMZN.O) and Hulu.

Total U.S. subscribers for the Netflix online service that streams movies and TV shows reached 23.9 million at the end of June, the company said. It added 560,000 customers in foreign markets, for a total of 3.6 million.

Netflix is moving away from mailing DVDs in its signature red envelopes, a business that only operates in the United States. DVD customers declined by 850,000 in the second quarter.

Pacific Crest Securities analyst Andy Hargreaves said the company's underlying business was solid and subscriber growth was in line with what he expected.

"The margins were fine," he said. "They are still growing and still leveraging the business."

(Reporting by Lisa Richwine; Editing by Andre Grenon and Chris Gallagher)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.