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Netflix Lowers Earnings Outlook on Angry Customers

Just two weeks after announcing a price adjustment that angered many customers, Netflix came out Monday with a weaker-than-anticipated earnings outlook.

Netflix
CNBC.com
Netflix

While the entertainment distributor reported a 52 percent rise in second-quarter revenue, it also reaffirmed a temporary slowdown in subscriber growth and said that its third-quarter revenue would be hampered by reactions to the price change. Netflix stock, which peaked above $300 earlier this month, dropped 10 percent in after-hours trading Monday, after closing at $281.53 earlier in the day.

Netflix posted second-quarter revenue of $789 million, up 52 percent from the same quarter last year. It said its profit for the quarter was $68 million, up 55 percent.

For the third quarter, Netflix said it expected revenue to be $799.5 million to $828.5 million, which was lower than previous projections on Wall Street.

The price adjustment, announced July 12, takes Netflix’s DVD-by-mail service, which was a $2 add-on to its $8-a-month online streaming service, and makes it a separate $8 package. For Netflix, the online streaming service, which remains $8, is growing much faster than DVD-by-mail. But some customers were outraged by what was effectively a 60 percent price increase for the combined service.

The price change “doesn’t take effect until the very end of the third quarter,” the Netflix chief executive, Reed Hastings, said in an interview Monday. “So we have to face those subscribers who are upset by the increase this quarter.” While he said he expected only “a few” to cancel or downgrade service, “that means less revenue than we otherwise would have had.”

The price change will benefit Netflix in the fourth quarter and beyond, he said, expressing no misgivings about the change in strategy. He said that Netflix intended to spend the increased revenue on its online streaming service, keeping its domestic operating margin for the year around its target of 14 percent. In the second quarter, its domestic margin was 16.3 percent.

“As our subscriber base continues to grow, we’re able to spend more on improving that service, both on the R.& D. side and on the content availability side,” Mr. Hastings said, using shorthand for research and development.

Keeping online streaming customers satisfied is a critical task for Netflix, which is vulnerable to the licensing decisions of Hollywood studios. Netflix has indicated that it is confident that it can pay what is necessary to license enough content from studios.

Mr. Hastings declined to comment on a Bloomberg News report that it was in talks to license the exclusive streaming rights to DreamWorks Animation films, replacing DreamWorks’ pact with HBO. An executive with knowledge of the deal, who spoke on condition of anonymity because no announcement had been made, said that HBO had offered DreamWorks an early departure from its contract with the premium cable company.

Netflix said that it remained in talks with its single biggest supplier of films, Starz. That agreement comes up for renewal in the first quarter of 2012.