UPDATE 3-'Arrested' bump disappoints Netflix investors, shares drop

Mon Jul 22, 2013 8:21pm EDT

(Rewrites lead; adds comments from Netflix executives, updates share price)

By Lisa Richwine

LOS ANGELES, July 22 (Reuters) - Quirky comedy "Arrested Development" lured new subscribers to Netflix Inc's streaming service in the second quarter, but not enough to impress investors who sent its shares tumbling 4 percent in after-hours trading on Monday.

"Arrested Development," which Netflix dusted off seven years after it last ran on Fox, generated "a small but noticeable bump in membership," Netflix CEO Reed Hastings and Chief Financial Officer David Wells said in a letter to shareholders.

Netflix said it added 630,000 streaming customers in the United States, hitting the middle of a forecast the company issued in April.

Wall Street analysts were unimpressed after the market sent the company's share price up 183 percent this year, the biggest gainer on the S&P 500 index, in reaction to buzz about shows such as "Arrested Development" and "House of Cards." On Monday, shares of Netflix fell 4 percent in after-hours trading to $251.50, down from their earlier $261.96 close on the Nasdaq.

"It was a good quarter, but not good enough," said Sterne Agee analyst Arvind Bhatia. "The stock had run up too much, too quickly."

Wall Street analysts on average expected Netflix to add 700,000 new customers to the U.S. streaming service, the largest part of its business, Bhatia said.

Netflix beat analysts' forecasts with $29 million in profit, or 49 cents per share, and up from $6 million a year earlier. Analysts on average expected 40 cents, according to Thomson Reuters I/B/E/S.

Reveue for the quarter was $1.07 billion, up 20 percent from $889 million a year earlier.

The company shook up Hollywood last week with 14 Emmy nominations for original series including "Arrested Development" and political thriller "House of Cards," the first Internet series to nab Emmy nods in major categories. The shows are part of a push into original content that Netflix hopes will bring in new subscribers.

Hastings said the company was pleased with the response to its original programming.

"The strategy is just beginning," he said in an interview. "The payoff is continued rapid membership growth. If we can continue our rapid membership growth, we'll feel very pleased."

The original shows are grabbing "TV-sized audiences," Netflix Chief Content Officer Ted Sarandos said in a video webcast with executives, an unusual format that replaced the traditional quarterly conference call. The company declined to provide viewership figures for the shows.

Netflix, in its shareholder letter, forecast it will add up to 1.5 million U.S. streaming customers in the current quarter. That guidance "looks like a little light," Gabelli & Co analyst Brett Harriss said. "Netflix needs to add a substantial amount of subscribers to justify the current valuation."

The company reported 29.8 million U.S. streaming customers at the end of June, and 7.8 million international streaming customers.

Netflix is working to add subscribers to pay the cost of movies and TV shows from Hollywood studios, its original shows, and a push into foreign territories. At the same time, it is facing competition from online players such as Amazon.com Inc and Hulu, which is getting a cash infusion of $750 million from owners Walt Disney Co, 21st Century Fox and Comcast Corp.

"Now that Hulu has more money to spend, content prices may rise further," Hastings and Wells said in their letter. "But we have many multi-year deals in place to mitigate this." (Additionals reporting by Liana B. Baker; Editing by Ronald Grover, Steve Orlofsky and Bob Burgdorfer)

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