| LOS ANGELES
LOS ANGELES Netflix Inc. (NFLX.O), the largest
online DVD rental company, on Monday reported its first-ever
quarterly drop in subscriptions and cut forecasts for
subscribers, revenue and profit for the year in the face of
fierce competition from Blockbuster Inc. BBI.N
Shares fell 4 percent 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.
Chief Financial Officer Barry McCarthy told analysts on a
conference call that Wall Street estimates for fiscal 2008
earnings growth were "excessively optimistic."
"When Blockbuster decides to operate its online business
profitably, our financial results will improve also, but until
that time both subscriber growth and earnings will remain under
pressure," McCarthy said.
Netflix has spent the last six months fending off a rising
challenge from Blockbuster, which said it will spend $170
million this year to promote its Total Access plan. That allows
subscribers to swap DVDs rented online at its stores for free
and has become a powerful competitor to Netflix.
On Sunday, Netflix cut prices for two of its most popular
monthly rental plans by $1 each, to $16.99 and $8.99, to bring
them in line with Blockbuster's online-only rental plan. It
previously had cut two other plans by $1 each.
The Los Gatos, California-based company, which pioneered
online DVD rentals and controls two-thirds of the market, said
its net subscriber base dropped to 6.74 million from 6.8
million in the first quarter.
Despite the raft of bad news, Netflix beat Street profit
projections by a wide margin, and Chief Executive Officer Reed
Hastings said the company expects to sign up more subscribers
in the back half of the year "even if there is no change in
Hastings said the downward revisions of Netflix's forecasts
reflected a worst-case scenario that Blockbuster would continue
to run its online business at a loss.
WAITING IT OUT
"They are responding in ways that make sense, ways that
arguably are the best way to try and protect shareholder value,
but that doesn't mean shareholder value will go up," said JP
Morgan analyst Barton Crockett, who has an "underweight" rating
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.
Excluding some items, Netflix earned 31 cents per share,
compared with the Wall Street target of 25 cents per share,
according to Reuters Estimates.
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.
Wedbush Morgan Michael Pachter, who has a "sell" rating on
Netflix, said the company appeared to have cut marketing
"If they don't spend money on marketing they are delusional
if they think it's going to attract millions of subscribers,"
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.
Shares of Netflix fell to $16.60 in extended trading after
closing down $2.36, or 12 percent, at $17.27 in regular trading
Monday on Nasdaq.