Netflix shares drop after subscriber forecast

LOS ANGELES Tue Oct 23, 2012 6:04pm EDT

A Netflix disk envelope is displayed in Encinitas, California, July 25, 2011. REUTERS/Mike Blake

A Netflix disk envelope is displayed in Encinitas, California, July 25, 2011.

Credit: Reuters/Mike Blake

LOS ANGELES (Reuters) - Netflix Inc signed up fewer new U.S. subscribers than Wall Street expected and rolled back the total number of customers for the year, sending its shares plunging 15 percent.

Netflix said on Tuesday it added 1.2 million new customers to its on-demand TV and movie streaming service in the United States during the July to September period, for a total of 25.1 million.

Shares of the company fell 15 percent to $58.04 in after-hours trading, down from an earlier $68.22 close on Nasdaq.

"Subscriber numbers were lower than expected, and the guidance for full year (customers) was lower than expected too," said Arvind Bhatia, an analyst at Sterne, Agee & Leach. "The streaming numbers don't look that great."

Netflix projected its U.S. membership base in the fourth quarter would reach as high as 27.1 million.

That would fall short of CEO Reed Hastings' earlier forecast made six months ago that the company would add 7 million new U.S. streaming customers this year. To reach that goal, year-end subscribers would need to hit 28.7 million.

Quarterly profit beat Wall Street expectations. The company posted third-quarter earnings of 13 cents per share, or $8 million. Analysts on average had expected 4 cents per share, according to Thomson Reuters I/B/E/S. Revenue reached $905 million, Netflix said.

A year ago, Netflix reported $1.16 in earnings per share and revenue of $822 million.

For this year's third quarter, free cash flow dropped to negative $20 million. Because of spending on original programs such as "House of Cards" and "Hemlock Grove," as well as other content costs, "we anticipate negative (free cash flow) for several quarters," Hastings and CFO David Wells said in a letter to shareholders.

They said the company had enough cash on hand to fund its expenses and return to positive cash flow, but would reexamine its spending plans for new programs next year.

Netflix previously warned it will lose money in the fourth quarter as it spends to add service in Scandinavia, part of a costly international expansion that is hitting its bottom line. On Tuesday, it forecast a $13 million loss to a $2 million profit for the last three months of the year.

In the third quarter, Netflix added 690,000 customers in foreign markets, bringing the total to 4.3 million.

(Reporting By Lisa Richwine in Los Angeles; Additional reporting by Alistair Barr in San Francisco; Editing by Gary Hill, Bernard Orr and Ronald Grover)

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