Netflix Warns of More Cancellations, Shares Drop

Netflix Inc lost more customers than it anticipated in the third quarter and warned of still more defections to come, pushing its shares down almost 20 percent as the one-time Wall Street star grapples with the fallout from a price hike and other unpopular moves.

The top video rental company reported a better-than-expected 49 percent surge in third-quarter revenue to $822 million, surpassing Wall Street's target of about $812 million. It reported earnings per share of $1.16 on net income of $62 million. Analysts had expected earnings per share of 94 cents, according to Thomson Reuters I/B/E/S.

But investors -- mindful of how the company led by CEO Reed Hastings had driven away customers in recent months and damaged its credibility with a price hike and other high-profile stumbles -- focused on the fourth-quarter warning.

Netflix shares plummeted almost 20 percent to $95.50 in after-hours trading, 68 percent below the high of nearly $300 per share in July.

The reason the stock is getting crushed is the trends just continue to deteriorate, Janney Montgomery Scott analyst Tony Wible said.

Netflix said it had lost more than 800,000 U.S. subscribers in the third quarter, more than the about 600,000 it had forecast in September. Total U.S. subscribers stood at 23.8 million.

Looking forward, the company said DVD subscriptions will decline sharply this quarter but total U.S. subscribers, which includes its online streaming service, will be slightly up.

The subscriber numbers were disappointing. It looks like they see very weak subscriber numbers in the fourth quarter, said Lazard Capital Markets analyst Barton Crockett.

Netflix also forecast a loss for the first quarter of 2012 as it expands into Europe.

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 and development, Hastings said in a letter to shareholders accompanying its quarterly report.

Hastings added that subscriber defections because of the price-hike should slow in coming quarters as the price effect washes through.

The company that shook up Hollywood with its DVD-by-mail service is trying to recover from the roughest patch in its nearly 15-year history as it moves to emphasize online streaming of television and movies.

Shares have plummeted since July, when Hastings announced a price hike for subscribers who wanted both DVDs and streaming. A wave of cancellations hit the company that had been famous for red-hot growth and loyal customers.

Hastings apologized for not explaining his decision well and admitted to arrogance, but instead of soothing concerns he set off a new wave of complaints with a plan to put the DVD service on a separate website called Qwikster. He quickly dropped the widely panned idea.

As Netflix stumbles, rivals such as Dish Network Corp's Blockbuster, Amazon.com Inc and Wal-Mart Stores Inc's Vudu are ramping up their online entertainment offerings to better compete with Netflix.

In the letter to shareholders, Netflix said it was moving forward as quickly as we can to repair our reputation and return to growth.