Investors worry about Netflix subscriber growth

Shares slump after hours, after the company adds fewer domestic subscribers than expected.

By Charley Blaine Jul 22, 2013 7:56PM
Netflix CEO Reed Hastings © ENRIQUE MARCARIAN/Newscom/RTRIf you miss in a way nobody expects, your stock will get hit. That's what happened to Netflix (NFLX) late Monday.

Shares were down as much as 11% briefly, after hours -- after the company said it had added 630,000 domestic subscribers in the second quarter. The shares recovered somewhat from that low.

Analysts had expected at least 676,000 new subscribers, and the hope to continue the stock's momentum was north of 700,000.

The smaller-than-expected subscriber growth called into question the company's hopes that its strategy of streaming popular movies and shows, combined with strong original content, will boost revenue and profit in the long run.

The shares were down $11.15, or 4.3,  to $250.81 at 7:25 p.m. ET Monday, after falling $2.62 to $261.96 in regular trading. Before Monday, Netflix had been the best performer by far among Standard & Poor's 500 ($INX) stocks, up 185% on the year. The rebound may help stocks on Tuesday. Futures trading suggests a flat open.

Netflix earned $29 million, or 49 cents a share, on revenue of $1.07 billion, up from $6 million, or 11 cents a share a year ago. Revenue in the 2012 second quarter was $889 million.

The company expects to earn 30 cents to 56 cents a share in the third quarter. The Street estimate is 43 cents a share.

The company said its new shows like "House of Cards" and "Arrested Development" provided small bumps of subscriber growth, but Ted Sarandos, who is the company's content chief, wouldn't offer specific numbers. The company hopes that "Arrested Development," which had been on cable TV, will be a core franchise for years to come.

The company's letter to shareholders fretted about how so much competition from competitors like Amazon.com (AMZN) could lead to market "saturation," but CEO Reed Hastings (pictured) said the differentiation point will be quality of content. "House of Cards" was nominated for nine Emmy awards last week.

The issue with Netflix has been how it can build up and expand its video streaming content, so that the company can attract new subscribers. New subscribers boost revenue and helps finance new content. The company is using its domestic profits -- and borrowings -- to finance international expansion, especially in Europe and Latin America.

So far the international business is losing money, but analysts haven't been too concerned, so long as domestic growth is strong. The domestic business generated $151 million of contribution profit in the second quarter, up from $87 million a year ago. Domestic revenue was up 26% to $671 million. 

For the third quarter, the company is guiding for $697 million as the midpoint of revenue in its domestic business, with a profit of $166 million. It sees a loss of $70 million to $86 million in its international business. Revenue should be $170 million to $184 million.

The Netflix report was among the most anticipated in the second quarter earnings season. The biggest -- from Apple (AAPL) -- comes after Tuesday's close. Analysts expect $7.31 a share in fiscal-third-quarter earnings, down from $9.32 a year ago. Revenue is expected to be flat at $35 billion.

Also reporting Tuesday are United Parcel Service (UPS), DuPont (DD), Freeport-McMoRan Copper & Gold (FCX) and AT&T (T).

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