The Exchange

Netflix Plunges on Disappointing Subscriber Growth

The Exchange

Netflix (NFLX) shares dove more than 25 percent Wednesday after the online video streaming and DVD rental firm lowered its expectations for domestic user growth, raising new concerns about the company's long-term prospects as it continues to expand internationally. The drop followed a 19.4 percent aftermarket plunge following the second-quarter earnings release Tuesday evening.

And that was on better-than-expected financial results.

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Earnings for the Los Gatos, Calif.-based company plunged 91 percent from $1.26 per share to only $0.11 per share in the quarter, while revenue increased 12.7 percent to $889 million. Both figures however, despite the marked drop in earnings, were more or less in line with analyst expectations.

But Netflix is having a hard time adding (and keeping) customers in the U.S., a trend that clearly has investors rattled. The company had previously forecasted 7 million net domestic additions for 2012, but on Tuesday said it might have trouble reaching that number. "Our guidance is 1 million to 1.8 million domestic net adds," Netflix CEO Reed Hastings wrote in a letter to shareholders as part of the quarterly report. "If we finish Q3 in the high end of that range, we would remain on track for 7 million domestic net additions for the year; otherwise it would be challenging to achieve that goal by year end."

Netflix added just 530,000 net U.S. customers in Q2 for a total domestic user base of 23.9 million.

A Rough Year Continues

Netflix has been reeling since the fall of 2011, when the company first increased subscription prices and later announced plans to spin off its DVD-by-mail service (oddly dubbing it "Quickster") to focus on its online streaming offering full-time. The move turned into an epic PR failure for the firm, as subscribers revolted and Hastings was eventually forced to backpedal on the plan, though the rate hike remained in place.

"I messed up. I owe everyone an explanation," Hastings wrote on the company's blog following the bungled announcement. "It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes. That was certainly not our intent, and I offer my sincere apology."

Netflix's stock price took a nosedive following the price hike and Quickster fiasco, bottoming out some 70 percent off of its $305 per share peak, last seen in June 2011, but had made progress in recent months, closing at over $80 before Tuesday's announcement.

Is Europe Really the Answer?

The company has lately been betting on international growth to kick start profits. It added a streaming service in Canada in 2010 and has since expanded into Latin America, the UK and Ireland. Netflix's next international market is expected to be in Europe, though the company on Tuesday did warn that it expects to report a loss in Q4 as part of this next step in its expansion.

The company added 560,000 net new international subscribers in Q2, though the overseas operating still accounted for $89 million in overall losses for the company. Netflix currently has about 3.6 million subscribers in Canada, Latin America and UK/Ireland.

"We have enormous challenges ahead," Hastings wrote, "and no doubt will have further ups and downs as we pioneer Internet television. We are making progress in every market we serve, and see a once-in-a-generation opportunity ahead to build the world's most popular TV show and movie service."

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