Rivals and churn burn Netflix stock

Netco's stock down as profit rises

NEW YORK — Is Netflix on the outs with investors?

Although the company turned in a satisfactory financial performance in the second quarter, the money men were not impressed and dropped the company’s stock 21% in after-hours trading.

Netco nearly tripled profit and increased its subscription base to more than 5 million for the first time in its history.

But the encroachment of other companies into the downloading biz is striking fear in the heart of some observers, who worry about the future of Netflix’s mail-based biz.

And existing subscribers left Netflix at a rate that made some observers unhappy. The all-important cancellation rate, or churn, came in at 4.3% in the quarter, down from 4.7% the previous year but higher than the 4.1% in the first quarter — and higher than some analysts had expected.

The company said the advent of warm weather — particularly in cities that endure frigid winters — was the source of the problem for the April-June frame.

Minneapolis, for instance, saw churn hit a startling 20%, while warmer regions like Southern California had churn rates in the low single digits. The implication: As the temperature goes up, people want to watch fewer DVDs.

Analysts also were disappointed that the company had not raised its full-year profit projections above the $30 million-$35 million it had made earlier.

Netflix is trying to fend off both Amazon.com, which is readying its own downloading service, and Apple, which has been negotiating with studios to sell movies via iTunes. To compete, Netflix must go through the laborious task of digitization as well as winning over postal-happy customers.

Netflix may be feeling the pinch from those hurdles: Company implied it would be a while before downloading would be firmly in place, saying it would provide a full update on its plans in January.

Execs generally continued to ring a skeptical bell about near- and mid-term prospects for downloading.

“Every day brings new announcements and stories about downloading, and it would be all too easy to conclude that movie downloading is exploding in growth,” Netflix CEO Reed Hastings said. “(But) they continue to show no growth in traffic. Nada.”

Execs predicted there would be no threat from downloads over the next three to five years, citing “no effective competition” and the fact that many pics are tied up in output deals.

“We recognize (the DVD) will not last forever, but it really will be dominant for a very, very long time,” Hastings said.

Still, company continued its ambiguous position on the subject, saying it “intends to be the leader before (downloads) start to grow” and that a recent stock issuance was done mainly to build up reserves to pay for investments in downloading biz.

The stock drop marks a sharp turn away from an earlier lovefest; investors had sent the company’s shares up more than 30% in the first four months of the year.

Overall in the second quarter, Netflix profit jumped to $16.8 million, while subscribers jumped by 303,000 to 5.2 million. Revenue was up 46% from last year to $239 million, falling just short of expectations.

Hastings admitted it was “not a perfect quarter but a very strong quarter,” while chief financial officer Barry McCarthy called the frame “the most profitable quarter in our history.”

But analysts were less convinced, questioning execs about the cost of acquiring subscribers and the squeeze that Blockbuster and Apple may place on the company.

In addition to dismissing some of the download plans, Netflix also noted a contradiction in the Blockbuster approach of displaying in-store promos for its online biz by comparing it to “going into a Southwest terminal and seeing an ad to take Greyhound.”

Netflix defended its newer lower-priced plans, which are growing quickly but have lower margins than the traditional $17.95 plan. Execs said the plans were worthwhile for the Netco because they bring in subs who otherwise wouldn’t be members at all.

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