Netflix subscriber outlook disappoints, shares plunge

LOS ANGELES Wed Jul 25, 2012 4:58am IST

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

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LOS ANGELES (Reuters) - Netflix Inc (NFLX.O) warned on Tuesday it may have trouble reaching its year-end target for new subscribers and will record a loss in the final three months of the year, news that sent the video rental company's shares down nearly 16 percent after hours.

For the second-quarter, Netflix reported earnings of 11 cents a share, beating analysts expectations of 5 cents, and said it added 530,0000 new customers to its video streaming service in the U.S. market.

But in a quarterly letter to shareholders, the company said the Olympic games that begin this month will likely hurt its ability to sign-up new customers in the current 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 the shareholder letter.

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.

Netflix also said it would lose money in the fourth quarter when it launches in another international market.

The company recorded a loss in the first three months of the year as it expanded into Britain and Ireland, but it came back with a $6 million profit in the second quarter. 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. But they added: "We are making progress in every market we serve."

Netflix needs to keep growing fast to pay the 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.

A year ago, Netflix posted earnings of $1.26 a share for the quarter, which ended just before its controversial decisions to raise prices and charge separately for its streaming and mail service prompted a wave of cancellations.

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)