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Netflix Outlook Falls Short as Price Rise Cuts User Growth

Netflix fell $23.53, or 8.4 percent, to $258 in extended trading. Photographer: Susan Biddle/The Washington Post/Getty Images
Netflix fell $23.53, or 8.4 percent, to $258 in extended trading. Photographer: Susan Biddle/The Washington Post/Getty Images

July 25 (Bloomberg) -- Netflix Inc., the mail-order and online film-rental service, forecast third-quarter sales and profit that fell short of analysts’ projections as a price increase cuts new-user signups. The shares dropped.

Profit this quarter will be 72 cents to $1.07 a share, Los Gatos, California-based Netflix said today in a statement online. Sales will be as much as $828.5 million. Analysts were projecting profit of $1.11 a share on sales of $842.9 million.

Because of the price change, the company expects to sign 401,000 new domestic subscribers this quarter, a fraction of the 1.8 million added in the period just ended. Netflix split its mail-order and streaming services into two plans, effectively raising prices by 60 percent to $15.98 a month for people who want both DVDs and online access.

“Netflix miscalculated on this one, and are basically saying all our growth is going to be absorbed by people who quit,” said Michael Pachter, an analyst at Wedbush Securities in Los Angeles who had an “underperform” rating on the stock. “It’s not clear how successful they’re going to be at attracting and retaining people with these new pricing plans.”

Netflix fell $29.03, or 10 percent, to $252.50 in extended trading. The shares rose $4.95 to $281.53 at 4 p.m. New York time in Nasdaq Stock Market trading. The company said it had 24.6 million customers at the end of June.

Chief Executive Officer Reed Hastings said on a conference call he “feels bad” some customers are upset. Users of the online service will enjoy “the amazing new content we will be able to license” with money from the increase, he said.

Wean Them Away

The majority of Netflix’s U.S. customers now purchase the streaming and mail-order plan that Hastings has been trying for the past few months to wean them away from, he said.

“We’re convinced we can thrive on streaming only,” Hastings said.

Second-quarter net income rose 55 percent to $68 million, or $1.26 a share, from $43.5 million, or 80 cents, a year earlier, Netflix said. Analysts predicted $1.12 a share, the average of 27 estimates in a Bloomberg survey.

Sales gained 52 percent to $789 million in the period, compared with analysts’ projections of $790.5 million.

The company signed up 1.96 million new users, boosting the total to 25.6 million worldwide, according to the statement.

Netflix is expanding its online business to Latin America and the Caribbean this year. Mexico City-based TV Azteca SAB today announced a three-year deal to supply 1,000 to 1,500 hours of Spanish-language programming annually starting in September.

DreamWorks Animation SKG Inc. is in talks to offer Netflix exclusive streaming rights, replacing a pay-TV accord with HBO, a person with knowledge of the situation said July 23. Hastings declined comment.

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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