Netflix Stock Drops After Quarterly Earnings Report Release

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The company's shares fell as much as 10% after the closing bell.

Shares of Netflix, which bucked Wall Street’s downward trend on Monday during the regular session, fell as much as 10% in after-hours trading upon release of quarterly earnings data.

The company also suggested slower growth in the near term, predicting even that its DVD shipments have already peaked due the popularity of its streaming service.

In a letter to investors, CEO Reed Hastings noted that the average subscription price slipped quarter-over-quarter because 75% of new subscribers are opting for the cheaper streaming-only plan.

Netflix added 1.8 million subscribers in the U.S. and another 160,000 in Canada. It closed the quarter with 24.6 million subs domestically and just shy of 1 million in Canada.

Hastings has said previously that Netflix is creating a distinct business unit for servicing its DVD subscribers, and on Monday he said the company has no intention of selling off the new unit. In fact, he said Netflix will “return to marketing our DVD by mail service, something we haven’t done for many quarters.”

His goal, he said in his letter to shareholders, “is to keep DVD as healthy as possible for as many years as possible.”

In the current quarter, Hastings predicted the company will add only 400,000 subscribers in the U.S. With an estimated 25 million domestic subscribers at the end of the third quarter, Hastings said 12 million will use both DVDs and streaming, while 10 million will use streaming only and 3 million will use DVDs only.

In the second quarter, earnings were up 57% to $68.2 million, or  $1.26 per share, which trounced estimates of $1.11. Investors, though, seemed to be keying on the revenue figure, which was up 52% to $789 million, short of the $792 million that had been expected.

Plus, Netflix said it would generate up to $805 million in revenue in the current quarter while analysts were figuring on about $845 million.

Netflix shares rose $5.26, or 2%, to $281.84 in regular trading but were off more than $27 a share after the closing bell.

In his shareholders’ letter, though, Hastings boasted that Netflix could achieve its first $1 billion quarter in history in the fourth quarter, due in part to a controversial price hike announced a few weeks ago.

Much has been made of the 60% increase and a few analysts asked Hastings about it Monday.

The CEO said he was “feeling great” about the decision because the additional revenue would allow Netflix to pay rising licensing costs for streaming movies and TV shows.

He also said Hulu Plus and Amazon Prime haven’t amounted to much competition yet, and he reiterated that Netflix has no intention on bidding for Hulu, which is seeking a buyer.

Hastings also disclosed a hiccup in the company’s Facebook initiative, courtesy of a “fairly poorly drafted” law 23 years ago called the Video Privacy Protection Act.

Giving analysts a bit of a history lesson on a conference call Monday, Hastings said the VPPA was concocted in response to someone leaking Judge Robert Bork’s rather non-controversial movie-rental records during his Supreme Court hearings.

Under the VPPA, it is ambiguous whether a user can give permission for their own viewing data to be shared, so Hastings said Netflix will launch on Facebook in Canada and in Latin America, but not in the U.S.  In his letter to shareholders, he advocated passage of HR2471, which would clarify the VPPA, “enabling us to offer our Facebook integration to our U.S. subscribers.”