Payment Hurts Netflix’s Profit

Netflix Inc. said Wednesday that third-quarter profit declined 63%, citing the costs of a legal settlement. The company, the largest mail-order movie-rental service, raised its profit forecast for the fourth quarter.

Net income fell to $6.95 million, or 11 cents a share, from $18.9 million, or 29 cents, a year earlier, the Los Gatos, Calif., company said. Sales increased 23% to $174.3 million.

Netflix said it paid $3.2 million in the period for the settlement of a class-action lawsuit that claimed false advertising.

Margins narrowed as the company introduced a $9.99 plan allowing one rental at a time that added subscribers faster than expected.

“We think the company’s new pricing will ultimately cannibalize its existing subscriber base,” wrote Michael Pachter, a Wedbush Morgan Securities analyst in Los Angeles, who has a “sell” rating on the shares. “We expect to see a migration of existing Netflix customers from the $17.99 subscription plan to the $9.99 plan, and expect to see a corresponding decline in gross profit dollars over time.”

Netflix lets customers order DVDs from a website, keep three at a time under the $17.99 plan and return them by mail. It doesn’t charge late fees and offers free shipping on its more than 50,000 movie titles.

Shares of Netflix, which reported results after the market close, fell $1.22 to $27.13 after hours. In regular trading, the stock had closed up 90 cents, or 3.3%, at $28.35.

The company was expected to earn 15 cents a share, according to the average estimate of analysts polled by Thomson Financial.

Netflix raised its fourth-quarter net income forecast to as much as $7.5 million from $6 million, on sales of as much as $196 million, an increase from earlier guidance of $193 million.

The company had 3.59 million subscribers at the end of the quarter, up 61% from the year-earlier period. Churn, or the percentage of customers who cancel their service each month, fell to 4.3% from 5.6% a year earlier.