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Netflix Q3 2011: Shares Drop As Customers Flee

Netflix 4q

First Posted: 10/24/11 06:42 PM ET Updated: 12/24/11 05:12 AM ET


By Lisa Richwine
(Reuters) - Netflix Inc lost more customers than it anticipated in the third quarter and warned of still more defections to come, pushing its shares down almost 20 percent as the company grapples with the fallout from a price hike and other unpopular moves.

The top video rental company reported a better-than-expected 49 percent surge in third-quarter revenue to $822 million, surpassing Wall Street's target of about $812 million.

But investors -- mindful of how the company led by CEO Reed Hastings had driven away customers in recent months and damaged its credibility with a price hike and other high-profile stumbles -- focused on the fourth-quarter warning.

Netflix shares plummeted almost 20 percent to $95.50 in after-hours trading.

"They missed slightly on subscribers for this quarter, and their guidance is not very good at all. Those are the two data points that are driving the stock lower," said Gabelli & Co analyst Brett Harriss.

The company also forecast a loss for the first quarter of 2012 as it expands into Europe.

"We expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development," Hastings said in a letter to shareholders accompanying its quarterly report.

Hastings added that subscriber defections because of the price-hike should slow in coming quarters "as the price effect washes through."

The company reported earnings per share of $1.16 on net income of $62 million. Analysts had expected earnings per share of 94 cents, according to Thomson Reuters I/B/E/S. But it was not immediately clear if those earnings numbers were comparable.

Netflix also said it had lost more than 800,000 U.S. subscribers in the third quarter, more than the approximately 600,000 it had forecast in September.

"The subscriber numbers were disappointing. It looks like they see very weak subscriber numbers in the fourth quarter," said Lazard Capital Markets analyst Barton Crockett.

The company that shook up Hollywood with its DVD-by-mail service is trying to recover from the roughest patch in its nearly 15-year history as it moves to emphasize online streaming of television and movies.

Shares of the one-time Wall Street darling have plummeted by more than 60 percent since July, when Hastings announced a price hike for subscribers who wanted both DVDs and streaming. A wave of cancellations hit the company that had been famous for red-hot growth and loyal customers.

Hastings apologized for not explaining his decision well and admitted to "arrogance," but instead of soothing concerns he set off a new wave of complaints with a plan to put the DVD service on a separate website called Qwikster. He quickly dropped the widely panned idea.

As Netflix stumbles, rivals such as Dish Network Corp's Blockbuster, Amazon.com Inc and Wal-Mart Stores Inc's Vudu are ramping up their online entertainment offerings to better compete with Netflix.

(Reporting by Lisa Richwine, editing by Bernard Orr)
Copyright 2011 Thomson Reuters. Click for Restrictions.

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Filed by Ramona Emerson  |