Investors dumped shares of Netflix in after-hours trading after the company announced Monday afternoon that it had lost 810,000 subscribers in the third quarter while warning that sales and earnings would fall short of expectations in the fourth quarter.
At one point, shares of Netflix fell more than 31% in response to the disclosure, which accompanied the company's Q3 earnings announcement.
Netflix finished the quarter with 23.8 million subscribers period, falling short of the 24 million subscribers management had forecast. Management expects to gain U.S. subscribers in the current quarter, although Netflix didn't set a specific target.
In the quarter, earnings rose 65 percent even though the video subscription service suffered the biggest customer losses in its history. The financial results covered an abysmal stretch that saw Netflix Inc. lose its luster among consumers and investors. Netflix triggered the backlash by raising prices as much as 60 percent in the U.S. and bungling an attempt to spin off its DVD-by-mail rental service.
The company earned $62.5 million, or $1.16, per share, in the third quarter. That compared to income of $38 million, or 70 cents per share, at the same time last year.
In a letter to subscribers it issued, Netflix detailed a chronology of errors that it said would hurt its fourth quarter performance:
We think that $7.99 for unlimited streaming and $7.99 for unlimited DVD are both very aggressive low prices, relative to competition and to the value of the services, and they are the right place for Netflix to be in the long term. What we misjudged was how quickly to move there. We compounded the problem with our lack of explanation about the rising cost of the expansion of streaming content, and steady DVD costs, so that absent that explanation, many perceived us as greedy. Finally, we announced and then retracted a separate brand for DVD. While this branding incident further dented our reputation, and caused a temporary cancellation surge, compared to our price change, its impact was relatively minor. Our primary issue is many of our long?term members felt shocked by the pricing changes, and more of them have expressed that by cancelling Netflix than we expected.
The company is hosting a conference call this afternoon. We'll have further details about this developing story.Because of this, our revenue and profits in Q4 will be lower than we had anticipated, but we'll remain profitable on a global basis. In Q1'12 we'll be launching in the UK and Ireland, as we had planned. For a few quarters starting in Q1, we expect the costs of our entry into the UK and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and Technology & Development. After launching the UK and Ireland, we will pause on opening new international markets until we return to global profitability. We plan to do that by increasing our global streaming subscriber base faster than we increase our costs.
Source: http://feeds.cbsnews.com/~r/CBSNewsMain/~3/aCwiTXyoNAs/
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