Bloomberg News

Netflix Plunges on Loss Forecast as U.S. Stumble Curbs Expansion

October 25, 2011

Oct. 25 (Bloomberg) -- Netflix Inc., the DVD and video- streaming company, plunged after projecting losses in 2012 and delaying global expansion plans because of faltering results in the U.S., its largest market.

Netflix tumbled 27 percent to $87 in extended trading yesterday after predicting losses for “a few quarters” in 2012. The Los Gatos, California-based company has surrendered more than $10 billion in market value since hitting an all-time closing high of $298.73 on July 13, according to Bloomberg data.

The company faces rising content costs, a customer revolt over a price increase and startup costs as it expands into Latin America, followed by the U.K. and Ireland in early 2012. Other new markets will have to wait, Chief Executive Officer Reed Hastings said.

“What they’re doing is hitting the reset button,” Michael Olson, an analyst with Piper Jaffray & Co. in Minneapolis, said in a Bloomberg Television interview. “They’ve shot themselves in the foot here.”

As a result of cancellations, domestic customers this quarter will fall short of the 24.9 million analysts forecast. The outlook suggests Netflix has been unable to contain a user revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services.

Hastings, 51, responding to questions, said he has no plans to step down and declined to comment on discussions with Netflix directors. On Oct. 10 he backed down from plans to create a separate mail-order DVD service called Qwikster.

“We’ve definitely had our stumbles,” Hastings said in an interview. Slowing down the expansion “is a good thing from an investor’s standpoint.”

No ‘Grand Gestures’

Hastings also downplayed the likelihood of a big increase in marketing efforts to restart domestic subscriber growth.

“Our streaming marketing has been very effective in the past two years,” Hastings said. “We are going to work on improving the user interface, expanding to more platforms and delivering more content. There’s no grand gestures, there’s just a lot of steady and intense efforts.”

U.S. streaming subscriptions are forecast to decline this month, level off in November and rebound in December to end at 20 million to 21.5 million, Netflix said in a website statement. DVD subscriptions will fall “sharply” to 10.3 million to 11.3 million customers.

Fourth-Quarter Outlook

Fourth-quarter profit will be $19 million to $37 million, or 36 cents to 70 cents a share, on revenue of as much as $875 million, the company said. Analysts were projecting profit of $1.10 a share on sales of $919 million, according to Bloomberg data. The company earned $47.1 million, or 87 cents a share, on sales of $595.9 million, a year earlier.

Domestic subscriber growth is particularly important because Netflix has used its wide lead over U.S. rivals to finance growth in its streaming business and expand overseas.

Yesterday, Netflix announced it will begin selling subscriptions in the U.K. and Ireland in 2012, putting it in competition with Amazon.com Inc.’s LoveFilm.

For the third quarter, Netflix reported net income rose 65 percent to $62.5 million, or $1.16 a share. Analysts projected 95 cents, the average of 25 estimates. Sales gained 49 percent to $821.8 million, beating expectations of $812.8 million.

Netflix had projected a loss of 600,000 users to end the third quarter at 24 million. The actual results were in line with the average loss of 780,000 customers seen by 10 analysts in a Bloomberg survey.

Domestic churn, a measure of subscriber turnover, jumped to 6.3 percent in the third quarter from 4.2 percent in the prior three months. The company’s total subscriber count, including service in Canada and Latin America, fell to 25.3 million from 25.6 million

--Editors: Rob Golum, Anthony Palazzo

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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