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Netflix Shares Plunge on Big Dip in Outlook for New Member Growth

The streaming service’s total members and profit jumped in the latest period, but growth in subscribers will hit a wall, it says

Netflix continued to win fans worldwide in the first quarter, but thanks to some price increases in the pipeline, the company doesn’t expect to do the same going forward.

The streaming-video service’s new subscribers rolled in better than the company predicted and profit soundly beating expectations in the first three months of the year, but new member growth is expected drop off a cliff this quarter as Netflix begins to raise prices for some its oldest customers, it said.

U.S. subscribers to Netflix rose by 2.23 million to 46.97 million in the first quarter, besting its outlook for 46.49 million that the company predicted in January. Overseas subscribers increased by 4.51 million to 34.53 million, again beating its guidance for 34.37 million.

The weak outlook pushed shares down as much as 13 percent in after-hours trading. The drop Monday erased more than a third of Netflix stock’s increase over the past year, which had been up about 33 percent through the close. Later on, the share drop eased to 9.2 percent at $98.39. 

Looking ahead to its second-quarter results, Netflix predicted it would add 2.5 million new streaming customers globally, less than half the levels of the latest period. It predicted only 500,000 new U.S. members, and it anticipated just 2 million people everywhere else in the world would sign up.

The weak outlook suggests that Netflix is finally feeling the effects of fee increases it has announced over the last couple years. Two years ago in May, the company boosted its rates by a dollar, followed by another dollar hike in April of last year. But to ease the transition, Netflix “grandfathered in” people who were already subscribed before the hikes, so they saw no change in their bill.

But that grace period is about to run out.

Monday, Netflix said it would “phase out this grandfathering gradually over the remainder of 2016, with our longest-­tenured members getting the longest benefit,” according to a letter to shareholders.

Netflix tried to take the edge off the weak outlook. It noted that last year and the year before (and the year before), it added basically the same number of U.S. members in the spring. And the company said its weak international outlook had more to do with a tough comparison to its launch in Australia and New Zealand the year before.

The results come as Netflix faces down a heightened competitive threat from Amazon, which unexpectedly unveiled an option for people to subscribe to its own subscription video service for $8.99 a month, a dollar cheaper than Netflix’s main plan.

Overall for the three-month period ended in December, Netflix reported a profit of $27.7 million, or 6 cents a share, compared with $23.7 million, or 6 cents a share, a year earlier. Revenue rose 24 percent to $1.958 million.

Analysts on average expected per-share profit of 3 cents on $1.966 billion.