Netflix revenue lags Street expectations

By Reuters
Posted July 21, 2010 at 5:10 p.m.

Netflix Inc’s second-quarter revenue missed Wall Street’s expectations as more subscribers opted for lower-priced plans, and the company’s shares fell more than 9 percent after hours.

“For the last two quarters, the acceleration of our growth has been astounding, driven by the increasing appeal of streaming. This kind of rapid acceleration is unlikely to continue for long, but as our guidance for the third quarter implies, we do see it continuing in the third quarter,” Netflix Chief Executive Reed Hastings said in a statement on Wednesday.

Second quarter revenue rose to $519.8 million from $408.5 million. Analysts on average had forecast the company to post earnings of 70 cents on revenue of $524.4 million, according to Thomson Reuters I/B/E/S.

The Internet video subscription service said in a statement that its margins improved because the company was shipping fewer video discs as subscribers streamed more movies and TV shows online. Netflix ended the second quarter with 15 million subscribers, up 42 percent from 10.6 million a year ago.

The quarterly subscriber figure was at the top of Netflix’s own projected range for the quarter, but analysts had hoped it would blow past it.

Netflix said it expected to end the third quarter with between 16.3 million to 16.7 million subscribers, and the year with 17.7 million to 18.5 million subscribers .

“Some people are disappointed about the revenue and that there was not as much subscriber growth as some might have hoped. The subscriber levels only hit the high end of guidance and expectations have been amped up,” said Barton Crockett, analyst with Lazard Capital Markets.

Netflix reported second quarter net income of $43.5 million, or 80 cents per share, compared with $32.4 million, or 54 cents per share a year ago.

The company’s stock fell 9.3 percent to $108.51 in after-hours trading after closing at $119.68 a share on the Nasdaq. The 52-week range is $39.27 and $127.96.

Year-to-date, the share price has risen by 118 percent and is trading at a price to earnings ratio of 53.83.

Analysts attribute much of the share price rise to the growing subscriber base and enthusiasm for the Internet streaming service market. But Wall Street is beginning to question when these near-term positives will give way to heightened competition and content cost inflation.

“The stock is priced for perfection when you’re trading at that kind of multiple. My belief is that there will be growing competitive pressures,” said Tony Wible, an analyst with Janney Montgomery Scott.

“While Netflix enjoys the lead in Internet streaming, the barriers to entry are lower than ever, which will lead to more competition like Hulu Plus and an expected streaming service from Coinstar’s Redbox,” Scott said.


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