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Netflix Tumbles After Price Increase Reduces New

Customer Growth, Outlook By Cliff Edwards - Jul 26, 2011

Netflix Inc. (NFLX), the mail-order and online film-rental service, tumbled after its third-quarter sales

and profit forecast missed analysts’ estimates and the company said a price increase was crimping

new-user signups.

Netflix fell $14.62, or 5.2 percent, to $266.91 at 4 p.m. New York time in Nasdaq Stock Market trading.

The shares have retreated 12 percent from the high of $304.79 set two weeks ago.

Because of the price change, Los Gatos, California-based Netflix expects to sign 401,000 new domestic

subscribers this quarter, a fraction of the 1.8 million added in the period just ended. The company said

in a statement yesterday it finished the second quarter with 24.6 million domestic customers.

“Netflix has seen an acceleration in churn for the last two quarters and that trend is only going to get

worse with the price increase and the rise in competition,” said Tony Wible, a Janney Montgomery

Scott LLC analyst who has a “sell” rating on the stock. He noted a jump in accounts payable to $533

million.

Profit this quarter will be 72 cents to $1.07 a share, Netflix said in the statement. Sales will be as much

as $828.5 million. Analysts were projecting profit of $1.11 a share on sales of $842.9 million.

‘Miscalculated’

The company split its mail-order and streaming services into two plans, effectively raising prices by 60

percent to $15.98 a month for people who want DVDs and online access.

“Netflix miscalculated on this one, and are basically saying all our growth is going to be absorbed by

people who quit,” said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who has an

“underperform” rating on the stock. “It’s not clear how successful they’re going to be at attracting and

retaining people with these new pricing plans.”

Chief Executive Officer Reed Hastings said on a conference call he “feels bad” some customers are

upset. Users of the online service will enjoy “the amazing new content we will be able to license” with

money from the increase, he said.

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The majority of Netflix’s U.S. customers now purchase the streaming and mail-order plan that

Hastings has been trying for the past few months to wean them away from, he said.

“We’re convinced we can thrive on streaming only,” Hastings said.

Profit Rises

Second-quarter net income rose 55 percent to $68 million, or $1.26 a share, from $43.5 million, or 80

cents, a year earlier, Netflix said. Analysts predicted $1.12 a share, the average of 27 estimates in a

Bloomberg survey.

Sales gained 52 percent to $789 million in the period, compared with analysts’ projections of $790.5

million.

The company signed up 1.96 million new users globally, boosting the total to 25.6 million worldwide,

according to the statement.

Netflix is expanding its online business to Latin America and the Caribbean this year. Mexico

City-based TV Azteca SAB yesterday announced a three-year agreement to supply 1,000 to 1,500 hours

of Spanish-language programming annually starting in September.

DreamWorks Animation SKG Inc. is in talks to offer Netflix exclusive streaming rights, replacing a

pay-TV accord with HBO, a person with knowledge of the situation said on July 23. Hastings declined

to comment.

To contact the reporter on this story: Cliff Edwards in San Francisco at [email protected]

To contact the editor responsible for this story: Anthony Palazzo at [email protected]

®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.

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