Netflix disappoints investors and guides lower

Yesterday Netflix‘s shares declined 27% after Netflix posted disappointing subscriber numbers during their third quarter. Netflix lost 800,00 subscribers in the third quarter which was noticeably higher than the 600,000 that they had previously forecasted.  Netflix also guided lower for the upcoming 4th quarter, far below analysts’ estimates.

HackingNetflix /Foter

 In recent months, Netflix has been struggling with higher content licensing renewal expenses with Hollywood studios while maintaining their ambitious international growth plans. The company failed to renew their licensing agreements with Starz and Sony.

Over the summer, Netflix CEO Reed Hastings decided to  increase the cost of Netflix‘s subscription plans to generate more cash. His decision proved to be unpopular with Netflix subscribers and the company faced a wave of cancellations. To complicate matters further, Netlflix announced that they would split their DVD division from their streaming division through a spin off by forming Qwikster, a new division of Netflix that handled their DVD subscriptions with an entirely separate billing system. The change was not well embraced by Netflix subscribers who made their voices known to Netflix‘s management. Feeling overwhelmed by subscriber angst, Neftlix management suddenly reversed their decision and terminated their plans to use Qwikster. CEO Hastings was featured on Time magazine’s most influential persons earlier in 2011 but his erratic business decisions with the company caused Netflix investors to lose confidence in his vision and high growth business model.

Netflix‘s stock price has declined over 60% since its peak in July 2011. Once a high growth momentum stock that earned its status as one of the best performing stocks in the stock market, Netflix seemed to be unstoppable. The company positioned itself to be at the forefront of video distribution and quickly eroded the dominance of well established brick and mortar movie video companies such as Blockbuster and Hollywood Video.

Netflix dominated through their mail order DVD delivery system with low overhead and strategically positioned the company to benefit from the game changing shift in video delivery with streaming movies. But the competition for Netflix has been fierce lately and is showing no signs of retreating. Many larger companies with deep pockets such as Google, Apple, Walmart, Amazon, Dish-Blockbuster are now directly competing against Netflix for streaming market share. And other companies such as HBO and Red Box (Coinstar) are also proving to be formidable competitors in the video distribution market.

4th Quarter Forecast

Netflix is projecting more subscriber churn (cancellations) during their next fourth quarter results. Netflix forecasts 19 to 37 million subscribers in the 4th quarter or 30 cents to 70 cents per share with $ 875 in revenue which is lower than analysts’ estimates of $1.10 per share on revenues of $919 million. On their DVD side, Netflix is projecting a decline from 13.9  at the end of Sept. to 10.3 million at the end of December 2011.

For the third quarter, Netflix posted reasonably good numbers. The company posted $62.5 million in revenues or 1.16 per share. In  the third quarter of 2010, Netflix had revenues of 38 million or .70 cents per share.

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