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Netflix expected to suffer 4Q loss as costs rise

Size of projected loss, subscriber growth to be focal points of Netflix's 4th-quarter results

Associated Press

SAN FRANCISCO (AP) -- Netflix Inc.'s fourth-quarter report is expected to show the video subscription service ended 2012 the way it started it — with a loss caused by rising costs for Internet licensing fees and an expansion into other countries beyond the U.S.

WHAT TO WATCH FOR: Investors will be focusing on the magnitude of the loss and Netflix's subscriber growth when the numbers come out after the stock market closes Wednesday.

If the fourth-quarter setback works out to 17 cents or more, it will saddle Netflix with its first annual loss in a decade. Analysts don't think the company lost quite that much. In October, though, Netflix management released a forecast warning the company could lose as much as 23 cents per share during the final three months of the year — or squeak out small profit.

The number of subscribers that Netflix added during three-month stretch that includes the holiday season is likely to be much more important to Wall Street, particularly after the company had more difficulty attracting more customers last summer.

The third-quarter slowdown prompted Netflix to back off an earlier pledge to add 7 million subscribers to its Internet video service during 2012. In its revised forecast, Netflix predicted the U.S. video streaming service would end the year with 27.1 million subscribers at most — a gain of about 5.4 million customers from the beginning of the year.

If that scenario plays out, Netflix will have added 2 million U.S. Internet video subscribers in the fourth quarter. That would mark Netflix's biggest quarterly subscriber gain of the year.

Netflix, which is based in Los Gatos, Calif., hoped to attract another 900,000 to 1.6 million customers outside the U.S. to tis Internet streaming service during the fourth quarter. That would leave Netflix with 5.2 million to 5.9 million international subscribers.

The company had been preparing for a loss of 450,000 to 750,000 subscribers to its DVD-by-mail service, which is slowly fading away as more households switch to watching video over high-speed Internet connections.

The quarterly conference call with analysts also will give Netflix CEO Reed Hastings a chance to discuss a recent spate of licensing deals that will expand the company's Internet video library. In the biggest coup, Netflix last month announced its Internet video service won the rights to show movies from The Walt Disney Co. shortly after their theatrical release beginning in 2016.

While most investors reacted enthusiastically to the licensing deals, some analysts are worried about Netflix ability to foot the bill without raising its prices. Taking that step might trigger another customer backlash like the one that occurred in 2011 when Netflix started charging separately for Internet streaming and DVDs — a switch that raised rates by as much as 60 percent for some U.S. subscribers. The mass customer defections after the 2011 price increase caused Netflix's stock to plummet.

Netflix has insisted it has no current plans to raise the rates for its Internet video service, which costs $8 per month in the U.S.

Entering the fourth quarter, Netflix owed $5 billion in Internet video licensing fees during the next five years, including $4.5 billion due before the end of 2015. Those figures are likely to be updated with the release of the fourth-quarter results.

WHY IT MATTERS: Despite its ups and downs, Netflix remains a home-entertainment trendsetter that has made it easier for people to forego cable service to save money. The company is also still trying to rebound from the steep downturn from its stock prices. After peaking at nearly $305 in July 2011, Netflix stock fell to as low as $52.81 last summer. The shares recently have been hovering around $100.

WHAT'S EXPECTED: Analysts polled by FactSet expect Netflix to lose 12 cents per share on revenue of $935 million.

LAST YEAR'S QUARTER: Netflix earned $35.2 million, or 64 cents per share, on revenue of $875.6 million in the last three months of 2011.

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