Downgrade sinks Netflix stock

Shares close down 3.4%; company defends strategy

Netflix stock stumbled Tuesday after a downgrade by S&P, while the company’s chief financial officer David Wells defended its strategy on all fronts — foreign expansion, a host of nonexclusive content deals and last week’s move to raise $400 million in a stock and debt sale to cushion its balance sheet.

Wells told investors at the Credit Suisse Technology Conference that Netflix is working to “bring the brand back brick by brick” after several flubs this year provoked a subscriber revolt. “I think this is a long-term thing that we have to live with. It will take a little bit of time for it to come back,” he said.

The once high-flying shares closed down 3.4%, or $2.38, at $67.57 after Standard & Poor’s late Monday cut its rating on the company’s debt to BB- from BB, citing spending on content and international expansion that will continue to erode profits.

Netflix has said it expects red ink in 2012 on new international services in the U.K. and Ireland.

The agency also thinks it may take longer than anticipated for domestic subscriber growth to resume. Netflix’s meteoric growth slammed to a halt last quarter. It ended September with 23.79 million U.S. subs, down from 24.59 million the previous quarter. The company effectively raised the price of its original DVD service and tried, then canceled plans, to rebrand it.

Wells reiterated the company’s prediction that net subscriber additions will turn positive for the month of December.

Analysts estimate Netflix will spend about $1 billion on content deals for its streaming service in 2011 and see that rising to $1.9 billion next year. Netflix doesn’t disclose those numbers but has said it expects spending to nearly double. Wells clarified that the “nearly” means the company is looking at an increase of about 78%.

He said there is money set aside for renewals and “opportunity buys.” Only about 15% of the budget is earmarked for exclusive or original programming — a conscious decision by company execs.

“Exclusivity matters when you have to be differentiated and for now there is no one in our direct space, so it’s important to have more…less exclusivity and more content,” Wells said.

As for international, Wells acknowledged that the U.K. market is highly competitive, a downside, but said that’s offset by the fact that it’s smoother sailing given the higher degree of device penetration. “We don’t have to do the marketing and heavy lifting of demonstrating to people” how streaming works, he said.