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Netflix Declines Most Since 2004 After Losing 800,000 U.S. Subscribers

Netflix Inc. (NFLX) dropped the most in seven years after the video-rental service said it lost 800,000 U.S. subscribers in the third quarter, more than expected, and predicted more cancellations over a price increase.

Netflix plunged 37 percent to $75.28 at 9:39 a.m. New York time, for the biggest intraday decline since October 2004. The stock closed at an all-time high of $298.73 on July 13, according to Bloomberg data.

The outlook suggests Netflix has been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and will delay further expansion until profitability is restored.

“Pausing is a good thing from an investor standpoint,” Chief Executive Officer Reed Hasting said in an interview. “We are going to pause and restore our global profitability.”

Hastings, responding to questions, said he has no plans to step down and declined to comment on discussions with Netflix directors.

Domestic subscribers fell to 23.8 million as of Sept. 30 from 24.6 million three months earlier, a bigger decline than the company projected in September, according to a website statement yesterday. This quarter, U.S. customers will fall short of the 24.9 million analysts were predicting.

Subscriber Fallout

Investors are trying to gauge the extent of the fallout from the price increase and aborted plan to put DVD customers on a new service called Qwikster.

“To show even modest U.S. subscriber growth in the fourth quarter will require significant ramp-up in Netflix’s marketing spending,” said Paul T. Sweeney, director of research for Bloomberg Industries.

Hastings downplayed the likelihood of a big increase in marketing efforts.

“Our streaming marketing has been very effective in the past two years,” Hastings said. “We are going to work on improving the user interface, expanding to more platforms and delivering more content. There’s no grand gestures, there’s just a lot of steady and intense efforts.”

Domestic streaming subscriptions are forecast to decline this month, level off in November and rebound in December to end at 20 million to 21.5 million, Netflix said. DVD subscriptions will fall “sharply” to 10.3 million to 11.3 million customers.

Fourth-Quarter Outlook

Fourth-quarter profit will be $19 million to $37 million, or 36 cents to 70 cents a share, on revenue of as much as $875 million, the company said. Analysts were projecting profit of $1.10 a share on sales of $919 million, according to Bloomberg data. The company earned $47.1 million, or 87 cents a share, on sales of $595.9 million, a year earlier.

Domestic subscriber growth is particularly important because Netflix has used its wide lead over U.S. rivals to finance growth in its streaming business and expand overseas.

Netflix had projected a loss of 600,000 users on Sept. 15 to end the third quarter at 24 million. The actual results were in line with the average loss of 780,000 customers seen by 10 analysts in a Bloomberg survey.

Domestic churn, a measure of subscriber turnover, jumped to 6.3 percent in the third quarter from 4.2 percent in the prior three months. The company’s total subscriber count, including service in Canada and Latin America, fell to 25.3 million from 25.6 million

For the third quarter, Netflix reported net income rose 65 percent to $62.5 million, or $1.16 a share. Analysts projected 95 cents, the average of 25 estimates. Sales rose 49 percent to $821.8 million, beating expectations of $812.8 million.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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