Netflix shares drop as revenue misses Wall Street’s target

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Wall Street’s sky-high expectations for Netflix Inc. sent its stock into a swoon after hours Wednesday as the fast-growing DVD-by-mail company failed to meet revenue expectations.

Netflix stock was down 9% in after-hours trading after it reported $520 million in revenue for the three months ending June 30. That was up 27% from the same period a year ago, but on the low end of guidance the company had provided to analysts.


The sharp drop in Netflix’s stock price reflects just how big hopes for growth have become among investors. The company reported a strong 34% rise in net income to $43.5 million and added 1 million subscribers, nearly four times as many as it added in the same quarter last year. Both figures were slightly above guidance.

The fact that Netflix added more subscribers, but not more revenue, than expected may indicate that many new subscribers are opting for the company’s lowest priced subscription plans, which start at $9 per month.

The continued growth of Netflix and the $1-per-night DVD kiosk company Redbox comes at the same time that DVD sales have been declining for nearly two years, though an industry group recently reported that the rate of decline shrunk significantly during the second quarter, thanks in large part to the DVD release of bestseller ‘Avatar.’

In comments accompanying the earnings report, Netflix Chief Executive Reed Hastings said that investing profits into acquiring content for the company’s Internet streaming service is a top priority.

In a small but groundbreaking deal sealed earlier this month, Netflix bought exclusive rights to films from Relativity Media for its Internet service during the time period usually reserved for pay cable. The deal put Netflix into direct competition with channels such as HBO and Showtime, a position Hastings cheered.

‘Exclusives ... are a core part of the pay-TV market into which we are growing,’ he said. ‘At this point we can start to afford some major TV shows and movies on an exclusive basis and plan going forward on a mix of more-expensive content and lower-cost non-exclusive content.’


Hastings also said that television shows are an important draw for Netflix’s online streaming service. However, TV streaming puts the company into direct competition with Hulu’s new premium subscription service. ‘The Hulu team is sharp and we’re not going to underestimate them,’ Hastings said.

Last quarter, a record 61% of Netflix subscribers watched a movie or TV show online, up from 37% a year ago and 55% in the first quarter of 2010.

At the same time, Netflix shipped fewer discs to subscribers than it expected and invested some of the money it saved on postage into marketing. Going forward, however, Hastings said the company will spend those types of savings on licensing more movies and TV shows for the Internet. ‘If we find enough content deals where the terms make sense to us, we’ll be spending lots more on streaming content,’ he said. ‘Otherwise, we can spend more on marketing.’

Based on the second quarter’s strong growth, Netflix substantially increased the number of subscribers it expects to have at the end of the year to between 17.7 million and 18.5 million, up from the 16.5 million to 17.3 million it predicted three months ago. It also slightly increased net income guidance to between $141 million and $156 million. By the end of the year, Hastings said, he expects the rapid growth Netflix is currently enjoying to wane.

‘This kind of rapid acceleration is unlikely to continue for long.’

Netflix shares closed down slightly at $119.65 before last quarter’s financial performance was announced.

-- Ben Fritz