Downer in Netflix's red envelope

Shares dive 12% on weak guidance, sub loss, downgrade

A trifecta of bad news whacked Netflix Inc. shares Monday.

The company that invented the subscription DVD-by-mail business lowered its full-year guidance, earned itself a Wall Street downgrade and reported its first sequential decline in subscribers in its history.

Those events, delivered a day after the company said it would cut the price of its most popular products, caused Netflix to tumble 12% on Monday to $17.27. Shares fell further after the markets closed when the company posted second-quarter earnings at the low end of expectations and slashed its outlook for the year. Netflix was Monday's worst performer on The Hollywood Reporter's Showbiz 50 stock index.

The one piece of positive news was that Netflix beat the profit expectations of most analysts who had presumed that competition from Blockbuster Inc. had a larger impact on Netflix's bottom line than it did.

Netflix said net income rose from $17 million a year ago to $25.6 million. Revenue jumped 27% to $303.7 million.

"Second-quarter revenue and subscriber growth reflected the impact of intense competition as we delivered subscribers and revenue at the low end of our guidance range even while achieving near record net income," Netflix CEO Reed Hastings said.

Blockbuster has been taking a bite out of Netflix with its Total Access plan that lets online subscribers also exchange movies at Blockbuster stores. Because of that competition, Netflix lowered its full-year guidance for revenue, subscribers and earnings and posted a 1% decline in subscribers compared with the first quarter.

Netflix, however, did grow subscribers 30% when compared with second-quarter 2006. Netflix had 6.7 million subs at quarter's end, and it expects to end the year with as many as 7.3 million subs, down from previous guidance of as many as 7.8 million.

Hastings said the company decided to lower its prices to retain current subs and resurrect growth, and that the company would offset that effort with a reduction in its marketing spending.

He said Blockbuster has so far chosen to grow its online business rather than turn a profit with it, putting a lot of pressure on Netflix.

Netflix said it will have $350 million in the bank and no debt at year's end after having bought back about $100 million in stock.

Jefferies & Co. analyst Youssef Squali downgraded Netflix from a "buy" to a "hold" after the company's report.

Hastings also said Netflix will discuss its strategy for digitally delivering movies to TV screens next year. The company's current strategy is for computer screens only. He anticipates several partners in next year's effort.