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Netflix Profit Falls Short of Estimates, Lowers Forecast

Online DVD rental company Netflix said its first-quarter profit more than doubled, but the company lowered its outlook for full-year revenue and subscriber growth amid heightened competition, sending its shares lower.

Netflix's shares fell $2.08, or 8.7%, to 21.86 in morning trading on the Nasdaq Stock Market.

The Los Gatos-based company said Wednesday that it earned $9.9 million, or 14 cents a share, during the first three months of the year. That more than doubled from net income of $4.4 million, or 7 cents a share, at the same time last year.

Revenue rose 36% from last year to $305.3 million.

Although it represented the fastest annual start in Netflix's 8-year history, the performance was dissatisfying to both investors and the company's management. The earnings were 2 cents lower than the average estimate among analysts surveyed by Thomson Financial.

'Disappointing' Quarter

Netflix Chief Financial Officer Barry McCarthy described the showing as the most disappointing quarter since the company went public in May 2002.

In addition, Netflix said it expected second-quarter profit of 18 cents to 24 cents a share. Analysts on average were expecting 29 cents, according to Reuters Estimates.

Second-quarter revenue is expected to be in the range of $303 million to $309 million, compared with Wall Street's expectations of $315 million.

For the full year, Netflix said it expected to report earnings of 76 cents to 83 cents a share, the same spread it forecast in January, but below the analysts' average estimate of 87 cents.

Netflix also cut its forecast for year-end 2007 subscriber figures to a range of 7.3 million to 7.8 million from its January outlook of 8 million to 8.4 million.

The company forecast 2007 revenue of $1.21 billion to $1.26 billion, down from the January forecast of $1.25 billion to $1.3 billion.

Subscriber Growth Under Pressure

Netflix has been under pressure since rival Blockbuster in November launched its Total Access plan, which allows its online subscribers to exchange DVDs at its stores.

Netflix Chief Executive Reed Hastings told analysts on Wednesday that the revised forecast reflected the company's view that while Blockbuster probably was losing money on Total Access, it may not raise subscription prices all year in a bid to quickly build its subscriber base of more than 2.2 million.

In the latest quarter, Netflix signed up 487,000 subscribers, a 30% drop from 687,000 new customers at the same time last year. The second quarter forecast assumes that the company may lose as many subscribers as it attracts durign the second quarter. That means Netflix may finish June with the same number of subscribers as it had at the end of March -- 6.8 million. Blockbuster is believed to have about 3 million online subscribers.

Blockbuster isn't scheduled to release its first-quarter numbers until May 2, but its management previously predicted the company's online service would lure 800,000 more customers during the first three months of the year.

"Our thesis that more people would choose Netflix seems open to question, at least for now," Hastings told analysts during Wednesday's conference call.

Netflix is hoping that Blockbuster won't be able to continue to give away DVDs from its stores without eventually raising the prices for its online rental service. Currently, both Blockbuster and Netflix charge $17.99 a month for the most popular rental program, which allows subscribers to hold on to as many as three DVDs at a time.

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