Co. expects higher subs acquisition costs, churn

HOLLYWOOD — The mighty have fallen.

High-flying online DVD rental shop Netflix, whose stock had risen by over 150% in just the past year, saw its shares plummet 28% in just one day Friday.

Investors fled after company indicated in its second quarter earnings report, which was released after markets closed Thursday, that its subscriber acquisition costs and churn would both be higher in coming quarters than expected.

With company closing yet another quarter with increased revenue and decreased net income, some investors expressed concern as to whether Netflix would be able to transform its growth into profits. Increased guidance for the rest of the year and assurances by CEO Reed Hastings on a conference call both indicated that Netco is shifting its focus toward profits, however.

But there was no getting over the rising subscriber acquisition costs, which Netflix attributed to the increasing cost of advertising on the Internet, where it spends most of its marketing dollars. Company plans to shift some of its ad spending to the more expensive TV medium as a result, and the trend shot up Netflix’s guidance for subscriber acquisition costs in the current quarter to between $37 and $39, while the figure was $35.12 in the second quarter.

Company also said that the impact of its second quarter price increase to $21.95 would be felt longer than expected and keep its churn rate higher than expected at around 5.1%.

“We think investors will (and should) focus their attention on management’s expectations for escalating SAC and incrementally higher-than-anticipated churn (at least over the near-term),” Pacific Growth Equities analysts Derek L. Brown and Neil McCluskey said in a research note. “Both [are] signs of modest degradation to the underlying fundamentals of the Company’s financial model.”

Researchers said they are still “bullish” on Netco’s long-term opportunities. But analysts at two other firms, WR Hambrecht and Roth Capital, downgraded Netflix stock from “buy” to “hold” and “neutral,” respectively.

As a result of these concerns, along with soon-to-launch competition from Blockbuster, worried investors started selling and Netflix stock closed Friday at $23.02, a low it hasn’t seen since last December.

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