Netflix slashes its forecast for subscriber gains

Associated Press
In this Tuesday, Oct. 23, 2012, photo, a woman holds up a Netflix envelope to be photographed in front of  a Netflix application on a television in East Derry, N.H.  Netflix slashed its prediction of how many U.S. video streaming subscribers it would add this year after subpar third-quarter results, causing a sharp sell-off in its stock in after-hours trading. The Los Gatos, California-based video streaming company said Tuesday it added 1.2 million net subscribers in the U.S. in the three months through September, which was on the low end of its previous forecast of gains between 1 million to 1.8 million. (AP Photo/Charles Krupa, File)
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In this Tuesday, Oct. 23, 2012, photo, a woman holds up a Netflix envelope to be photographed in front of a Netflix application on a television in East Derry, N.H. Netflix slashed its prediction of how many U.S. video streaming subscribers it would add this year after subpar third-quarter results, causing a sharp sell-off in its stock in after-hours trading. The Los Gatos, California-based video streaming company said Tuesday it added 1.2 million net subscribers in the U.S. in the three months through September, which was on the low end of its previous forecast of gains between 1 million to 1.8 million. (AP Photo/Charles Krupa, File)

LOS ANGELES (AP) — Netflix slashed its prediction for how many U.S. video-streaming subscribers it would add this year after subpar third-quarter results, causing a sharp sell-off in its stock in after-hours trading.

The Los Gatos, Calif.-based company said it added 1.2 million net streaming subscribers in the U.S. in the three months through September, which was on the low end of its forecast for gains between 1 million to 1.8 million.

The disappointing figure caused Netflix to cut its estimate for full-year U.S. streaming subscriber additions to between 4.7 million and 5.4 million. Previously, Netflix predicted it would gain as many as 7 million domestic streaming subscribers by year's end.

Growing streaming subscribers in the U.S. is crucial to Netflix because the number of DVD-by-mail subscribers continues to fall and its losses internationally are mounting. Last week, it added streaming service in Sweden, Denmark, Norway and Finland.

Netflix also needs more subscribers because it is sticking to its price of $8-a-month for unlimited video streaming. The company faced a huge backlash last year when it raised prices as much as 60 percent for people who subscribed for both DVD service and streaming. The company says its reputation has yet to recover.

CEO Reed Hastings brushed off the subscriber miss, even as Netflix shares were hammered, falling $11.13, or 16.3 percent, to $57.09 in after-hours trading.

"In perfect hindsight, it was not the best choice to put out that high a goal," he said in an interview with The Associated Press. "We want high goals, we're seeking to grow very quickly and have the member satisfaction be extremely high. But five million is great progress. And we look forward to building on that."

Netflix's chief financial officer, David Wells, said the heavily watched London Olympics cut into new subscriber signups in August and they didn't bounce back very strongly in September. The company also said that it was forced to turn off service to customers more often because it couldn't collect a valid credit or debit card — a result of it expanding into more lower-income homes.

Hastings said he still believes the company has the potential to sign up 60 million to 90 million homes in the U.S. in the long run, about two to three times the number that now subscribe to pay TV channel HBO.

"We feel that Netflix offers such a good value at $7.99 unlimited that even low-income households will choose to subscribe to Netflix in large numbers," he said.

The company ended the quarter with 25.1 million U.S. streaming customers and 4.3 million in other countries, which included an overseas gain of about 690,000 during the quarter. DVD-by-mail subscribers in the U.S. fell to 8.6 million from 9.2 million in June. About two-thirds of its DVD customers are also streamers.

Analysts said the company's inability to forecast subscriber growth correctly hurt the stock.

Andy Hargreaves, an analyst with Pacific Crest Securities, said the company's long-term target is "very, very optimistic."

"Nobody knows what's going to happen 10 years from now," he said. "They don't know what's going to happen next quarter."

Analyst Arvind Bhatia with Sterne Agee said Netflix's stock volatility is largely due to inconsistent forecasts.

"Poor visibility leads to poor stock performance," he said.

Despite the subscriber miss, the company said it earned $7.7 million, or 13 cents per share, in the latest quarter, beating the 5 cents per share expected by analysts polled by FactSet.

Revenue rose 10 percent to $905.1 million, in line with forecasts.

Netflix has said it would take the profits it makes from its declining DVD business and growing U.S. streaming operations to fund an ambitious overseas expansion. But slowing growth at home looks to put a damper on that enthusiasm.

The latest push into Scandinavia will boost its international losses to a "peak" in the final quarter of the year, according to a letter by Hastings and Wells. It already operates in Canada, the U.K., Ireland and several Latin American countries.

"We intend this to be our peak quarter of international losses, and expect international losses will decline quarter by quarter next year," they said. "Once we've substantially reduced international losses, and with Netflix then being solidly profitable on a global basis, we will launch our next round of international expansion."

Netflix predicted that its fourth-quarter earnings would range between a loss of $13 million, or 23 cents per share, and a gain of $2 million, or 4 cents per share. Analysts were expecting a loss of 5 cents per share.

The worst-case loss predicted by the company would push it into the red for the year, which would give the company its first annual loss in a decade.

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Business Writer Michael Liedtke in San Francisco contributed to this report.

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