Netflix reports first drop in subscriptions

By Gina Keating

LOS ANGELES (Reuters) - Netflix Inc (NFLX.O), the largest online DVD rental company, reported its first-ever quarterly drop in subscriptions and missed Wall Street revenue targets in the face of fierce competition from Blockbuster Inc. (BBI.N)

The company also cut its forecasts for subscribers, revenue and profit for the year on Monday, and its shares fell 4.5 percent further in extended trading. The stock had already closed the regular trading session 12 percent lower after the company cut prices on two of its subscription plans.

Net income for the second quarter was $25.6 million, or 37 cents per share, compared with $17 million, or 25 cents per share, a year earlier, boosted in part by a $4.1 million settlement of a patent dispute.

Revenue rose 27 percent to $303.7 million, from $239.4 million in last year's second quarter but finished behind analysts' average expectation of $307.8 million, according to Reuters Estimates.

Wedbush Morgan Michael Pachter, who has a "sell" rating on Netflix, said the company "pretty much announced last quarter that Blockbuster was hurting them" but appeared to have cut marketing spending in the quarter.

"If they don't spend money on marketing they are delusional if they think it's going to attract millions of subscribers," Pachter said. "It looks like they are trying to ... essentially wait it out until Blockbuster raises prices."

The Los Gatos, California-based company, which pioneered online DVD rental, said its net subscriber base dropped to 6.74 million from 6.8 million in the first quarter.

Netflix now expects to end the year with 6.8 million to 7.3 million subscribers, down from a previous forecast of 7.3 million to 7.8 million. It dropped its revenue expectation to between $1.17 billion to $1.19 billion from $1.21 billion to $1.26 billion, and reduced its net income outlook to 62 cents to 76 cents per share from 76 cents to 83 cents per share.

Netflix has spent the last six months fending off a heightened challenge from Blockbuster, which said it will spend $170 million this year to promote its Total Access plan. The plan allows subscribers to swap DVDs rented online at its stores for free.

On Sunday, Netflix cut prices for two of its most popular plans to bring them in line with Blockbuster's online-only rental plan, which had been $1 cheaper.

For the quarter, the rate of churn, or subscriber cancellations, rose to 4.6 percent from 4.3 percent for the second quarter of 2006.

Subscriber acquisition costs rose to $44.02 from $43.95 in the same period of 2006.

The company reported stock-based compensation costs of $2.8 million for the second quarter, compared with $3.1 million in the same period last year.

Shares of Netflix were down 4.5 percent at $16.50 in extended trading after closing down $2.36, or 12 percent, at $17.27 in regular trading Monday on Nasdaq.