Bloomberg News

Netflix Plunges on Guarded Outlook for New 2012 Signups

July 25, 2012

Netflix Cautions on User Growth, Sending Shares to 16% Tumble

The Netflix Inc. app is displayed for a photograph on a mobile device. Photographer: Scott Eells/Bloomberg

Netflix Inc. (NFLX:US), the world’s largest video-subscription service, fell the most in nine months after raising doubts about whether the company can meet its user- growth targets this year.

Netflix tumbled 25 percent to $60.28 at the close in New York, the biggest one-day drop since Oct. 25, after reporting second-quarter earnings yesterday. The Los Gatos, California- based company’s stock, down 13 percent this year, was the worst peformer in the Standard & Poor’s 500 Index.

The summer Olympics are likely to hamper efforts to sign up new customers, Chief Executive Officer Reed Hastings said yesterday in his quarterly letter to investors. The full year goal of adding 7 million new U.S. users will be “challenging” if this quarter’s most optimistic targets aren’t met, he said.

Analysts had been skeptical of the company’s outlook for new customers, which hinges on accelerating signups in the second half of the year. With 2.27 million new U.S. subscribers in the first half, the company won’t meet its forecast, according to David Miller, a Caris & Co. analyst in Los Angeles.

“The guidance is just not up to snuff, that’s the bottom line,” Miller said in an interview. “The stock’s marked down as it should be.”

“Whether we make 7.2 million or 6.8 million, we feel really good about our growth in the U.S.,” Hastings said in a telephone interview after the company reported second-quarter results. “We try to generally talk openly about the business with investors in public settings like an earnings letter, including giving our guesses on the subscriber numbers.”

Profit Plunge

For the year, six analysts surveyed by Bloomberg forecast subscriber growth of 4.2 million to 7 million, with an average of 5.58 million, as the company faces new competition from Verizon Communications Inc. (VZ:US)’s online venture with Coinstar Inc. (CSTR:US)’s Redbox.

Second-quarter net income totaled $6.16 million, or 11 cents a share, Netflix said in a statement on its website, a return to profit after a loss in the first three months of 2012 from Latin America and U.K. expansion costs. Analysts had forecast income of 5 cents, the average of 26 estimates compiled by Bloomberg. Profit plunged from a year earlier, when Netflix earned $68.2 million, or $1.11 a share.

Sales for the quarter rose 13 percent to $889.2 million from a year ago, beating the $888.9 million average estimate.

Hastings forecasts 1 million to 1.8 million new domestic accounts this quarter. So far, additions are pacing near the 1.8 million mark. The summer Olympics starting this month “are likely to have a negative impact on Netflix viewing and signups,” he said in the letter.

Quarterly Forecast

Netflix predicts sales of $890 million to $911 million this quarter, with results ranging from a loss of $6 million, or 10 cents a share, to a profit of $8 million, or 14 cents. Analysts see sales of $907.5 million and profit of 11 cents, the average of 26 estimates.

The company also said it expects a loss in the fourth quarter because of costs to expand into an unnamed European market. Hastings said Netflix will use profit from existing markets to finance its international expansion.

Hastings was asked on a conference call if investors should assume no meaningful growth in net income over the next few years as the company enters new territories.

“Yes, that’s completely consistent with what we have been saying, as long as there are good markets to enter around the world that we would take the U.S. profit or the global profits and put them into faster, international expansion,” he said.

For the second quarter, total domestic subscribers rose 530,000, in line with the April Netflix forecast for 190,000 to 790,000 and bringing the total to 23.9 million. Netflix added 1.74 million in the first quarter.

International Subs

The company added 560,000 international subscribers during the quarter to bring the total to 3.62 million. DVD customers shrank by 850,000 to 9.24 million.

The return to profitability and the increase in streaming customers provided evidence that Hastings has successfully stemmed last year’s customer rebellion. U.S. subscribers revolted when the company raised prices and tried unsuccessfully to split off the mail-order DVD business, a move that would have forced some users to have two accounts.

To contact the reporters on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

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


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