Netflix's financial performance was mixed in the period leading up to a controversial decision to raise prices by 60 percent, but investors didn't like the look of the company's future.
The video-rental service reported earnings for the second quarter after the close of trading today and said revenue came in at $789 million, a 52-percent jump from the year-ago period but still shy of the $791 million analysts had expected.
To make matters worse, Netflix said it expected to report earnings for the current quarter between 72 cents and $1.07 cents a share. That is less than the $1.09 number that analysts expected, according to Reuters. Netflix blamed the lowered expectations on the price hike, which isn't supposed to take effect until September. By announcing the increase months in advance, Netflix may have hurt subscriber growth in the current quarter but won't see any of the financial benefits associated with a price boost during the period.
"In (the current quarter) we will see only the negative impact of the pricing change," Netflix said in a letter to investors, "given that the announcement was early in the quarter and that the increases won't take effect until late in the quarter (September 15 on average). We expect domestic net additions in (this quarter) to be lower than the (the same period a year earlier) and because of the timing of the price change, revenues will only grow slightly on a sequential basis."
This wasn't the kind of news that already-shaky investors were hoping to see. Netflix's share price plummeted more than 10 percent to $255 in after-hours trading.
On the positive side, Netflix posted $68 million in net earnings or a $1.26 per share. Analysts on average had expected earnings of about $1.11 per share. The net gain represented a 55 percent increase compared with the same quarter a year ago.
Managers stated that they expected subscriber numbers to return to normal in the fourth quarter and that the benefits of the price increase will kick in during that period. Netflix said the fourth quarter could become the company's first billion-dollar quarter.
One of the metrics most important to investors is the number of subscribers and again Netflix reported mushrooming growth. Netflix added nearly 2 million new subscribers in the quarter and the company now has a total of more than 25 million. Again, the company's July 12 price-hike announcement didn't impact these numbers, which were only for the quarter ended June 30.
"During the quarter, the streaming-only plan continued to gain in popularity, with nearly 75 percent of our new subscribers signing up for it," the company said in the letter to investors. "As a result, our average subscription price reverted to a slight quarter-over-quarter decline."
Investors had already been spooked by the wave of customer antipathy towards the price increase.
Netflix announced it intends to do away with hybrid subscription plans that include access to both DVDs and Internet streaming, which for the time being cost $9.99 a month. Come September, there will be one plan for DVDs and a separate plan for streaming. Unlimited access to Netflix's streaming library will cost $7.99 per month, the same cost for the DVD plan (with one disc allowed out at a time).
To access both discs and Web video, users will have to pay for each plan separately, and that means $15.98 a month. The company said in its announcement that it hadn't anticipated the continued demand for DVDs and that it didn't make financial sense for Netflix to continue offering discs in addition to streaming access for $10 per month.
This is what Netflix had to say about the price increase: "Some subscribers will cancel Netflix or downgrade their Netflix plans. We expect most to stay with us because each of our $7.99 plans is an incredible value. We hate making our subscribers upset with us, but we feel like we provide a fantastic service.
"Our estimate is that by end of Q3 in the U.S.," Netflix continued, "we'll have about 22 million people subscribing to our streaming service, about 15 million people subscribing to our DVD service, and about 25 million total U.S. subscribers (with about 12 million people subscribing to both streaming and DVD)."