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Netflix shares tumble 10% after 2Q earnings report

Netflix shares dropped 10% after trading on Monday [25] in light of the results and comments by top brass that the controversial subscription price rise would lead to weaker than expected third quarter results.

CEO Reed Hastings declined in an earnings call to comment on reports on Bloomberg on Sunday that DreamWorks Animation was set to amend its pay-TV with HBO and sign a streaming deal with Netflix for its 2013-14 releases. DreamWorks Animation stock climbed 4% by midday trading on Monday following that revelation.

Netflix said revenue for the current quarter would fall in the $799.5m to $828.5m range, below the Street consensus estimate of $846.5m. Revenue for the second quarter ending Jun 30 came to $789m, marginally below the $791.5m consensus.

Hastings said that the company expected slower growth in the third quarter, given that the much-maligned decision earlier this month to increase by 60% the cost of the combined streaming and DVD mailing plan would come into effect by mid-September.

Hastings said that while the company regretted customer dissatisfaction – Netflix’s Facebook page reportedly received around 80,000 complaints – he was confident about new content that would become available by the fourth quarter. He also revealed that 75% of new customers had chosen the streaming-only plan.

The move to separate the DVD mailing and streaming businesses is in line with the international strategy to offer streaming-only plans. Hastings said the recent launch of its streaming service in Canada had “blown away expectations.”

The company will enter virtually the entire Latin American market in the fourth quarter before launching in another as-yet-unnamed market in early 2012.

Netflix faces rising costs to acquire streaming rights to material, a development which forced its hand on the price hike. It emerged during the call that the company conducts separate negotiations with studios and other content owners for DVD and streaming rights. It tends to commit upfront and pays a fixed amount, usually for a year. There is no revenue sharing, as there is on some DVD rentals.

There are currently 24.6m US subscribers, up around 8% from March, rising to 25.6m including Canada. Facebook integration will occur later this year except in the US, where it would contravene video piracy laws.

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