Netflix Discord in 66 Cent Loss to 96 Cent Net Outlooks: Tech

Netflix Inc. (NFLX), scheduled to report fourth-quarter results today, will seek to reassure investors that it has stemmed a subscriber revolt in the U.S. and is making progress toward a profit in Europe and Latin America.

Analysts project Netflix, the operator of an online and mail-order movie rental service, will post fourth-quarter profit of 54 cents a share, the average of 29 estimates compiled by Bloomberg and a drop from 87 cents a year earlier. They estimate the Los Gatos, California-based company will report sales of $857 million, a 44 percent increase.

“They’ve set the bar fairly low for the fourth quarter, but haven’t given much guidance for 2012, and that’s what everyone will be looking to,” said Arvind Bhatia, a Dallas- based analyst with Sterne Agee & Leach Inc. who has a “neutral” rating on the shares.

In one sign of that uncertainty, recent estimates for the full year range from the 66-cent loss seen by Jefferies & Co. analyst Youssef Squali to a 96-cent profit forecast by George Askew of Stifel Nicolaus & Co. The average is for a 2-cent loss.

Chief Executive Officer Reed Hastings began the quarter battling the loss of 800,000 U.S. subscribers over a 60 percent price increase for some users and since-aborted plans to force mail-order customers into a new DVD service called Qwikster. The shares, down 61 percent in 2011, have risen 34 percent this year on company remarks suggesting the subscriber rolls have stabilized.

Netflix said on Jan. 4 that users of its online streaming service spent more than 2 billion hours watching films and TV shows in the final three months of 2011, a sign additions to its streaming library are restarting growth.

20 Million

The company also said it had “more than 20 million streaming members globally.” That eased concerns it wouldn’t meet projections of 20 million to 21.5 million domestic streaming subscribers by year-end, said Michael Olson, an analyst with Piper Jaffray Cos. in Minneapolis who has an “overweight” rating on the stock.

“The fact that it provides some floor in what people thought could be a disastrous quarter gives increased confidence that the wheels aren’t totally falling off,” Olson said in an interview.

Steve Swasey, a spokesman for Netflix, said the company won’t discuss subscriber numbers prior to the results.

Netflix today probably will offer the first details on its expansion in Brazil and 42 other Latin American countries, and its foray this month into the U.K. and Ireland, Bhatia said. The company could lose $130 million overseas this year even if it signs up more subscribers than expected, he said.

Unlike the U.S., where Netflix enjoys a lead over rivals such as Hulu LLC and Amazon.com Inc. (AMZN), the company is entering new markets with entrenched competitors, including Amazon’s LoveFilm and NetMovies Entertainment in Brazil.

First-Quarter Outlook

In October, Netflix forecast losses for the year because of costs to start service in the U.K. and Ireland and said it would put further international expansion on hold.

For the current quarter, Netflix is projected to report a loss of 29 cents a share, the average of 26 analysts’ estimates, compared with a profit of $1.11 a year earlier. Analysts project sales will rise 18 percent to $845.6 million.

Of 30 analysts’ estimates compiled by Bloomberg, 20 forecast expect red ink through 2012 while 10 project a break- even year or better.

Netflix fell 1.4 percent to $92.67 at the close yesterday in New York. The stock is the second-best performing member of the S&P 500 this year, trailing only the 44.1 percent gain by Sears Holdings Corp. (SHLD)

Fading DVDs

The company probably lost 8 million to 9 million DVD customers in the second half of 2011, including 3.6 million in the fourth quarter, said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

Netflix finished the third quarter with 23.8 million domestic customers in total, according to a letter to shareholders. Of the 21.5 million who take the streaming service, fewer than half also subscribed for DVDs by mail. That service had 13.9 million subscribers.

To offset falling average spending by subscribers who choose not to pay $16 month for both DVDs and streaming, Netflix must win new online customers at a faster clip, said Pachter, who has an “underperform” rating on the stock and projects a loss of 33 cents for all of 2012.

The company raised $400 million in November selling stock and convertible notes, bolstering its $365.8 million in cash and short-term investments at the end of the third quarter.

Netflix is set to lose online access to films from Sony Pictures and Walt Disney Co. after its contract with John Malone’s Starz (LSTZA) LLC cable network ends in February. It plans to offset those losses in part by commissioning exclusive content to compete with premium channels like Time Warner Inc.’s HBO.

“While Netflix may increase subscribers in 2012, it is paying a steep price to do so,” Pachter wrote in a Jan. 22 research note.

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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