Bloomberg News

Netflix Results to Chart Progress Curbing Client Defections

November 03, 2011

(Adds today’s trading starting in fifth paragraph.)

Oct. 24 (Bloomberg) -- Netflix, the video-rental service grappling with a user revolt, reports results today that will show the extent of third-quarter subscriber losses and may offer clues to its progress in limiting defections this period.

Netflix is projected to report 23.8 million U.S. users as of Sept. 30, the average estimate of 10 analysts surveyed by Bloomberg. That’s below the 24 million the company projected on Sept. 15, and would represent a loss of 780,000 customers after the company raised prices and abandoned a plan to force customers into separate DVD-by-mail and streaming services.

If the past is a guide, Netflix will provide a forecast for fourth-quarter sign-ups, providing insight into the company’s efforts to retain customers. Analysts conflict on the outlook, with estimates ranging from accelerating user losses to a record gain.

“Everyone will be looking for some clarity on how many customers they’ve lost into October, and no one is sure we’ll get it,” said Michael Pachter, an analyst with Wedbush Securities Inc. in Los Angeles.

Before today, Netflix, based in Los Gatos, California, had tumbled 61 percent from a record close of $298.73 on July 13, the day after the company announced it would charge $7.99 each for the mail-order and streaming services, instead of $9.99 for both. The shares slipped 1 percent to $116 at 10:15 a.m. New York time.

Domestic Subscribers

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

Netflix, which ended the second quarter with 24.6 million U.S. users, has forecast the loss of almost 600,000 accounts in the third quarter, which suggests a domestic total of 24 million at the end of September.

Steve Swasey, a spokesman for Netflix, said the company won’t discuss subscriber numbers prior to the results.

Estimates for the fourth quarter vary widely. Andy Hargreaves, an analyst with Pacific Crest Securities in Portland, projects a loss of 2 million customers, as cancellations accelerate.

Wedbush’s Pachter expects the bulk of the losses to hit in the third quarter, dropping U.S. subscribership to 23 million. He predicts Netflix will unleash a marketing blitz that adds a record 3.59 million customers in the current fourth quarter, pushing the year-end total to 26.6 million.

‘Boatload of Money’

On average, the 10 analysts project Netflix will add 1.08 million domestic users this quarter, for a total of 24.9 million.

“To get to those numbers even, they’re going to have to spend a boatload of money trying to woo people back,” Pachter said. The company added 2.7 million subscribers in the fourth quarter of 2010.

Investors are concerned that customer additions will be tempered into next year, according to George I. Askew, an analyst with Stifel Nicolaus & Co. in Washington.

“The story remains tied to subscriber growth,” Askew wrote in an Oct. 21 research note.

Competitors may be gaining at the expense of Netflix. Dish Network Corp.’s Blockbuster On Demand added almost 500,000 new users to its by-mail disc rental service in September, according to the chain’s president, Michael Kelly.

Coinstar Forecast

Coinstar Inc. may see up uptick in business at its Redbox DVD-rental kiosks, said Michael J. Olson, an analyst with Piper Jaffray Cos. in Minneapolis. The Bellevue, Washington-based vending-machine operator will probably forecast fourth-quarter profit and revenue that exceeds analysts’ estimates after customers bolted from Netflix, he said.

“The tailwinds they are getting from the Netflix price changes are definitely strong enough that we could see them guide above consensus,” Olson said in an interview. “There are multiple data points that suggest Coinstar is going to be a beneficiary of the Netflix plan changes.”

Coinstar advanced 0.7 percent to $51.47 and has declined 9.5 percent this year before today. The company reports quarterly results on Oct. 27.

Prior to Netflix’s pricing change and the aborted plan by Chief Executive Officer Reed Hastings to rename the DVD-by-mail business Qwikster, the company had made dramatic customer gains. In the seven quarters through June, the company averaged 1.92 million net U.S. additions.

Sales Outlook

Company executives in July predicted the fourth quarter could be Netflix’s first to top $1 billion in sales. Analysts project sales of $921 million, according to Bloomberg data.

The company exceeded forecasts for earnings per share in each of the past eight quarters, according to Bloomberg data. Sales have missed estimates in five of the past eight periods.

For the third quarter, analysts project Netflix will report a 52 percent increase in net income to $57.8 million, or $1.07 a share excluding some items. Sales are expected to rise 47 percent to $813 million.

The company may for the first time provide detailed subscriber and financial data on its three businesses: DVD-by- mail, domestic streaming and international streaming, according to Barton Crockett, an analyst with Lazard Capital Markets in New York.

Detailed figures on the DVD business would help investors determine Netflix’s overall outlook, because DVD-only and hybrid customers appear to be driving profit, Crockett wrote in an Oct. 18. research note.

Margins in the DVD business are rising because users are taking out fewer DVDs per month, resulting in lower postal and fulfillment costs, Crockett said.

“The challenge for Netflix, if we are right and DVDs are driving profits, is that the DVD business looks mature, with subscribers, in our view likely to decline,” he said.

--With assistance from Michael White in Los Angeles. Editors: Anthony Palazzo, Rob Golum

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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