Netflix shares plunge 14%

Stocks dip after hours amid expansion costs and shifting sub prospects

Netflix has again showcased its unique ability to sow terror about its future even as it reports solid sales, a return to profitability and decent subscriber growth. Netflix shares plunged late Tuesday on investor jitters about expansion costs and sub prospects in a confusing, fast-changing media industry.

Net profit fell to $6.1 million last quarter from $68 million the year before, topping Wall Street expectations. Revenue jumped 13% to $889 million. The company expects to be profitable again in the current third quarter but it predicted red ink for the last three months of the year as it moves into an unspecified “attractive” European market.

Netflix launched in the U.K. and Ireland last quarter and operates in Canada and Latin America. It warned of aggressive competition in the U.K. from Sky’s new over-the-top service.

The company also expects the Olympics to dampen viewing and sign-ups this quarter with between 1 million and 1.8 million domestic net ads. At the high end, Netflix said, it might still hit its goal of 7 million net ads for the year, otherwise the target “could be challenging.”

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That all worried Wall Street and Netflix shares, which closed up a hair at $80.39 on Tuesday, dropped by almost 15% in after-hours trading. While the stock has had a run-up in recent weeks it’s still a far cry from a towering $300 last summer.

On a conference call with investors, execs said Netflix will continue overseas expansion until it’s done despite what appears to be growing investor distaste for the cost and uncertainty. The plan: open a new international market, work back to profitability, then repeat. “There is an opportunity to build a franchise in many markets and it will prove to be very valuable, and we’ll all be happy that we did it,” said founder and CEO Reed Hastings.

International revenue of $65 million jumped 50% sequentially. Netflix added 600,000 international subs, hitting 3.6 million, and expects to pass the 4-million mark this quarter.

Domestic streaming subs rose to 23.94 million from 23.41 million a year ago. Domestic media hours viewed per member grew substantially year-over-year, Netflix said, with total hours at a record level.

The company’s focus continues on exclusivity and original content, licensing titles like “Mad Men”, “Breaking Bad” and “Gossip Girl” and inking a multi-year exclusive agreement with Warner Bros. for “Pretty Little Liars” and “The Lying Game.” A deal with The Weinstein Company gives Netflix an exclusive window for theatrical titles after the expiration of their first pay window.

Hastings wasn’t definitive but indicated that Netflix likely won’t be paying up to keep a contract with Epix exclusive. Shareholders have been fretting as exclusivity with the Lionsgate-Paramount-MGM network ends in August, although the deal will continue for another year after that.

“We have it for the next year guaranteed, and then we’ll go from there,” Hastings said. He doesn’t expect a major shock if the pact ultimately goes away. “We wouldn’t expect to be affected significantly; Epix is not a particularly large source of total viewing.”

Netflix’s original drama “House of Cards” began filming in Baltimore in April and will debut early next year, along with a second season of “Lillyhammer”. “Arrested Development” and “Orange Is the New Black” are in the writing phase, and principal photography has just begun on “Hemlock Grove.” Netflix plans to expand the lineup.

As competition appears to be heating up, Verizon and Redbox have teamed up to create a rival to Netflix and are said to be launching an internal test of their new video streaming service this week. But Hastings dismissed streaming rivals and said the biggest threat is from cable operators like Comcast and networks like HBO through TV Everywhere.

“We have yet to see HuluPlus or Amazon Prime gain meaningful traction relative to our viewing hours,” he said. “Redbox Instant by Verizon, once they launch, will face a big challenge to break into the top three.”

In a letter to shareholders, Hastings said Netflix may “find opportunities to work together” with HBO since “consumers who are passionate about movies and TV shows are quite willing to subscribe to multiple services.” When asked, he said he’s “not sure what we would do. My point is that we are just another network and when you have multiple networks they often find a way of working together. There’s nothing particularly pressing.”

Execs don’t expect the recent spate of carriage disputes between MSO’s and cable programmers to impact Netflix’s access to content or the price it pays. Netflix has become a flashpoint in several heated battles as cable and satellite operators say they won’t pay high fees for shows consumers can watch on streaming services.

Cable programmers believe streaming availability of series on Netflix actually builds TV the audience and Hastings agreed, noting the service only shows past seasons “as the best way to grow the ecosystem.”

DVD subscriptions declined this quarter to 9.2 million, in line with company expectations. About 6.7 million of the 9.2 million also subscribe to the streaming service.

Asked about possible acquisitions, Hastings said not likely. “We haven’t’ given that a ton of thought. In 14 years we haven’t acquired anybody. I won’t say we’d never do it. But it would be a pretty high bar.”

But it may be staffing up. Earlier this week, Netflix hired Warner Bros. exec Kelly Bennett as chief marketing officer.

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