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Netflix revenue and guidance disappoints Wall Street

July 25, 2011 |  3:11 pm

NetflixHastings Netflix Inc.'s recently announced and much-reviled price increase will bring weaker third-quarter financial results than Wall Street had expected, contributing to a 10% drop in the company's stock in after-hours trading Monday.

Revenue in the three months ended June 30 was $789 million, just slightly below the consensus estimate from analysts of $791.5 million.

However, the company's predicted results for the current quarter were a significant disappointment. Netflix said it would generate between $799.5 million and $828.5 million in revenue, lower than the $846.5 million consensus. Earnings per share are expected to be between 72 cents and $1.07; Wall Street had forecasted $1.09.

In a letter to investors, Netflix Chief Executive Reed Hastings and Chief Financial Officer David Wells said slow growth in the current quarter would be driven by the price increase that sparked outrage among some users.

"In Q3 we will see only the negative impact of the pricing change, given that the announcement was early in the quarter and that the increases won't take effect until late in the quarter (September 15 on average)," the executives wrote.

Some people who currently subscribe to combined DVD-and-streaming plans that cost $10 or more per month have been switching to the $8 per month streaming-only plan or the newly-instituted $8 per month DVD-only plan rather than pay as much as $6 more per month under the new pricing structure.

In a tacit acknowledgement of the anger the price increase sparked, including more than 80,000 comments on the company's Facebook page, the letter said, "We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we're working hard to further improve the quality and range of our streaming content in Q4 and beyond."

The company predicted it would end the current quarter with between 24.6 million and 25.4 million subscribers in the U.S., which could mean no increase from its June 30 total of 24.6 million. Netflix expects that about 10 million people will choose the streaming-only plan, 3 million the DVD-only plan, and 12 million will pay higher prices for both.

Currently, about 75% of Netflix's new subscribers choose streaming-only.

In Canada, where only streaming is offered, Netflix ended the prior quarter with 970,000 subscribers and expects to grow to between 1.15 million and 1.45 million by Sept. 30. In the fourth quarter, Netflix will launch in virtually every Latin American country.

In a sign of the growing costs of acquiring content for its streaming video library, Netflix's net income and operating income for its domestic and international businesses are expected to decrease in the third quarter from the second quarter, despite growing revenue.

The value of content already in Netflix's streaming library skyrocketed to $612.6 million June 30, up from $192.3 million on March 31. Payments not yet due under digital content deals it has signed also grew significantly, to $419.8 million from $82 million.

The company did not comment on a soon-to-close agreement with DreamWorks Animation that was confirmed today by a person familiar with the matter.

Netflix stock closed up 2%, or $4.95, at $281.53 prior to the release of its financial results. The high-flying shares are up 60% this year.

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-- Ben Fritz

Photo: Netflix CEO Reed Hastings at the launch of the company's Canadian service last September. Credit: Mike Cassese / Reuters.

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