Netflix Stock Tanks; U.S. Subscriber Base Loses 800,000

1:28 PM PST 10/24/2011 by Paul Bond
Jin Lee/Bloomberg/Getty Images

UPDATED: The company's third-quarter results are the first look at its financial situation since a series of controversial moves sent its shares reeling.

Netflix lost 800,000 U.S. subscribers in the third quarter, about 210,000 more than the company had projected, and the stock was off $32 in after-hours trading as a result.

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The company's subscriber metrics were released Monday along with quarterly earnings, which were better than analyst expectations. The company earned $62.5 million, up from $38 million a year ago, on revenue that rose 49 percent to $821.8 million.

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Netflix shares rose 2 percent to $118.86 during the regular session but were down 27 percent after the closing bell.

The company's shares had already lost 60 percent of their value since July when the company announced a large price increase for subscribers who want both streaming and DVDs. The stock took another hit after CEO Reed Hastings announced he'd split the company in two, calling one half Qwikster, but then reversed that decision days later.

If after-hours action is to be believed, Netflix shares could open in $85-range Tuesday morning, which would represent a fall of 72 percent in three months time.

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During a conference call Monday, analysts peppered Hastings with questions about the price increase, Qwikster, the rising cost of acquiring streaming content and other developments that have decimated the stock lately.

Hastings said the company lost more subscribers than anticipated because "a second wave of cancellations"  occured in September and October once consumers got a look at the price increase that was announced in July, which was when the first wave of cancellations took place.

Of Qwikster, said Hastings: "In hindsight, it's hard to justify."

Hastings predicted "a slow decline over the next many years for DVD," even comparing it to the AOL dialup service from 2002 through today. In a 17-page letter to shareholders that included quarterly financial results, Netflix said it doesn't anticipate any further material investment in property, plant and equipment to support the DVD side of its business.

Ahead of its earnings announcement Monday, Netflix announced its intention to launch a service in Ireland and the U.K. next year. Some analysts suspected the timing was intended to counter a negative financial report.

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Netflix added Canada to its lineup last year. Last month, it added 43 countries in Latin America and the Caribbean. International subscriptions increased from 970,000 in the second quarter to 1.5 million in the third quarter.

Domestically, though, Netflix ended the third quarter with 23.4 million subs, down from 24.6 million in the second quarter.

Netflix said that "for a few quarters" starting in the first quarter it will not make a profit because of its push into the U.K. and Ireland. "We will pause on opening new international markets until we return to global profitability," Netflix said in its letter to shareholders.

The letter also boasted of recent content deals with DreamWorks Animation, Open Road and The CW, and it noted that the new Johnny Depp film The Rum Diary, as well as the stylish action flick Immortals will be available to Netflix subscribers exclusively in the pay TV window. (The letter, though, gets both titles slightly wrong).

The letter also seemingly defends Netflix's decision to soon end a relationship with Starz rather than renew it at a substantial fee increase -- or perhaps the passage is a negotiating tactic. "An Oscar-nominated film may be of less value to Netflix subscribers than Pawn Stars, because subs are watching the reality show more than the Oscar-nominated movie," the letter states.

"We have the Starz offering within our service, and it is currently running about 6 percent of viewing hours because we have added so many other movies and TV shows," says the letter. "In other words, 94 percent of the time members stream from Netflix, they are watching a non-Starz title."

 

 

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