Netflix sub growth cools in 2Q

Streaming service tops 25 million worldwide

Netflix took some lumps Monday for its mixed second-quarter results but warned of bigger bumps to come next quarter when the impact of its controversial pricing revamp is absorbed.

After-hours trading sunk Netflix’s high-flying stock by more than 10% after revenues for the quarter amounted to $788.6 million, slightly below the consensus Wall Street projection for $791.5 million.

But the company told investors to brace for impact in the third quarter, when the 60% price increase to the so-called hybrid segment of its subscriber base, which mixes DVD-by-mail with streaming, is expected to stall the company’s white-hot sub growth and, consequently, revenues.

Those numbers had already begun cooling in the second quarter of the year, with 1.8 million additions in the U.S. driving a total of 25 million subs worldwide. While still gangbusters vs. a year ago, the sub adds rep a marked drop from Netflix’s first-quarter add of 3.3 million.

Netflix CEO Reed Hastings defended his strategy in a conference call late Monday, emphasizing that the increase would help fund content acquisition on the streaming side. “We’re feeling great about the decision, as tough as it is,” he said. “It’s going to allow us to have fantastic streaming content going forward.”

Hastings didn’t, however, confirm what sources say is the company’s latest coup on that front, securing pay TV rights to pics from DreamWorks Animation, because the pact isn’t official yet. Announcement could come today, when DreamWorks releases second-quarter numbers.

Pact would bring some big titles like “Shrek” and “Kung-Fu Panda” to Netflix in a window where it lacks major partners as suppliers. HBO previously had DreamWorks Animation locked up in that window through 2014 but is believed to have let the studio out of its deal early to redeploy costs toward the original programming that has proved more material to its bottom line.

Netflix was also mum on the status of the films yanked off its site last month by Sony due to a contractual snafu with Starz. And there was no resolution on a separate renewal of Sony and Disney movie content Netflix gets through its Starz deal.

The second quarter wasn’t all bad news for Netflix: The company actually exceeded earnings estimates, with $1.26 earnings per share vs. expectations of $1.11. And Netflix pledged to be back on track by the fourth quarter, with an anticipated revenue jolt to come from the subscribers willing to stomach the hefty hybrid hike.

Research firm the Diffusion Group released a study Monday that estimated Netflix could lose upwards of 2 million subs due to the price hike, which goes into effect for most on Sept. 15.

Despite the assessment of many analysts that Hastings separated the physical-disc and streaming businesses to effectively phase out the former category, Hastings repeatedly emphasized that he is trying to maintain that still-sizable segment of its customer base. He pledged he would abstain from selling that aspect of Netflix’s business and invest in marketing it for the first time in years.

“DVD can last a long time as a service if we give it a platform to succeed on,” said Hastings, who also estimated that DVD shipments have “likely peaked” given that 75% of new subscribers signed up for streaming-only plan.

Netflix had little more to say on the international front but reaffirmed that it will not launch in a third international market in the first quarter of next year, but a plan to launch in more than one country could be on its list of ambitions next year. Variety reported last week that Netflix has already been discussing expansion with distributors in the U.K. and Spain.

Netflix touted its upcoming integration with Facebook, which should come just before third-quarter results are reported. However, the company noted that it will launch domestically only until congressional approval of a clarification to the Video Privacy Protection Act.

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