CEO Reed Hastings tells analysts: “Qwikster became the symbol of Netflix not listening”
Updated: 4:11 p.m. PT
As Netflix stock plummeted 27 percent in after hours trading, Reed Hastings reassured analysts that the company was committed to building its streaming service and growing its library even as it deals with widespread subscriber defections.
Netflix lost 800,000 members during a three month period marked by a costly stream of mistakes, including a price hike and an aborted plan to spin-off its DVD by mail business into a new company called Qwikster. It also forecast further losses in the fourth quarter underway.
Shareholders hammered the stock on this news, despite stronger than anticipated third-quarter earnings and revenue growth.
During an earnings calls with analysts Monday afternoon, a chastened Hastings said the company would work to regain customers' trust.
"Qwikster became the symbol of Netflix not listening," Hastings said, acknowledging that the company had botched its messaging.
"We know that it's been an extremely challenging time to be a shareholder over the last few months," he added.
Hastings also said that the company, which announced Monday that it will offer its streaming service in the United Kingdom and Ireland next year, will put a "pause" on its international expansion efforts. Netflix had been rumored to be planning to expand into Spain, but Hastings said that no new territories will be added until "…we get back to global profitability."
Absent the sluggish subscriber numbers, Netflix recorded a surprisingly robust quarter. Earnings per share at the subscription service rose 66 percent from the year ago period to $1.16 per share, while revenues climbed 49 percent $822 million. Analysts had projected the company would report earnings per share of $1.05 on $812.50 in revenue.
Net income jumped 63 percent from the same period last year to $62 million.
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Yet the company's subscriber rolls constricted. Netflix acknowledged the subscriber exodus, revising its membership projections last month to 24 million. The final tally was even worse than expected. Netflix said it currently has 23.8 million members globally.
The company said that less than half of its streaming customers also subscribe to its DVD plan and that over the fourth quarter it expected that number to decline "sharply," pulling down profits.
Netflix shares, which were trading at $300 last July, were selling for $86.85 in after hours trading on Monday. In that time, Netflix's market value has plunged from more than $16 billion to $4.6 billion, according to the Wall Street Journal.
In another sign that Netflix is still dealing with the fallout from angry customers, the company's churn rate — which measures membership cancellations — nearly doubled to 6.3 percent from 3.8 percent a year earlier.
Going forward, Hastings projected that the company's growth would be in the streaming sector and that the DVD component would be analogous to AOL's dial-up business — steadily declining, but with a strong residual market. He said that despite what the Qwikster experiment might suggest, Netflix still sees a role for its DVD by mail business.
"It's a source of profits funding our international expansion and it's a source of satisfaction for our more than 10 million subscribers who subscribe to our DVD service," Hastings said.
When Netflix unveiled the short-lived Qwikster, it said it would offer video games, but that might have vanished along with plans for a separate DVD business. The company said it has not made a decision whether it will offer customers video games.
In a letter to shareholders, Hastings acknowledged that the price increase to Netflix's most popular subscription service and the failed plan to uncouple the DVD business had tarnished the company's reputation and slowed its growth.
"Our primary issue is many of our long-term members felt shocked by the pricing changes, and more of them have expressed that by canceling Netflix than we expected," Hastings wrote.