Netflix to Wall Street: We Expected More Fallout From Our Big Rate Hike (Updated)

Revenues climb 52 percent and profits jump 55 percent during the second quarter, but failed to meet Wall Street expectations

Last Updated: July 25, 2011 @ 4:45 PM


Updated, 3:43 p.m.

Netflix executives on Monday predicted that any fallout from rate hikes would be short-lived.

Speaking with analysts following an second-quarter earnings report that fell short of Wall Street’s bullish forecast, executives downplayed criticism its recent subscription rate hike generated. Citing escalating postage and licensing costs, Netflix recently raised prices on its most popular subscription plan by nearly 60 percent.

“Believe it or not the noise level was actually less than we expected given the 60 percent price increase for some subscribers," CEO Reed Hastings told analysts. 

“We’re feeling great about the decision, as tough as it is, and it’s going to allow us to have better streaming content going forward," he added.  

Hastings declined comment on a possible streaming pact between DreamWorks Animation and Netflix. Reports indicate that a deal with the studio may happen this week, perhaps even in advance of DreamWorks Animations' Tuesday earnings release.

Profits for the Los Gatos, Calif., based company jumped 55 percent to $68 million for the three months ending in June, with earnings per share reaching $1.26. Revenues climbed to $789 million up 52 percent from the $409 million the company banked in the same period a year ago.  

Also read: Netflix, DreamWorks Animation Reportedly Near Streaming Pact

These were heady numbers indeed, but they simply weren't earth shattering enough. Analysts had projected revenues of $791.5 million; a benchmark Netflix failed to meet. However, Netflix's earnings were higher than the $1.11 per share analysts had anticipated.

Netflix's stock fell nearly 10 percent in after hours trading to $254.40 on the news.

The disappointing earnings announcement caps what has been a rare period of bad publicity for Netflix, formerly the belle of Wall Street thanks to its surging subscription rolls and the success of its streaming platform.

Netflix shares fell after the subscription giant's second quarter earnings failed to meet Wall Street's bullish forecast. 

On the positive side, the number of Netflix subscribers now tops 25 million, up from 15 million in the same period a year ago. The company expects that residual anger from the price hike will limit that growth going forward. It anticipates adding 190,000 to 1.29 million subscribers in the current quarter ending in September.

Some of that slow-down may be attributable to more options for consumers. In a note to shareholders, Netflix acknowledged that competition for the streaming dollar had increased recently. Amazon Prime and HBO Go are making incursions into the business and Hulu, which is profitable, is on the auction block. Netflix, however, told shareholders it would not join Amazon, Apple and others in the hunt for Hulu.

"We aren’t planning to bid on Hulu because most of its revenue is from providing free ad-supported streaming of current season TV shows, which is not our focus," Hastings and CFO David Wells wrote shareholders. 

One place customer's won't be finding Netflix, at least not domestically, is Facebook. Though the Netflix will integrate Facebook into its service in Canada and Latin America, it will not do so in the United States until it sorts out legal issues. It's chief concern is that by making rental recommendations to Facebook users based on what their friends are renting, the company would run afoul of the Video Privacy Protection Act. That 1988 law prevents companies from divulging customers' rental histories and was passed after Robert Bork's rental past was revealed during his Supreme Court confirmation hearing.

"It was poorly drafted and it’s fairly ambiguous…it’s that ambiguity that leads us to want to seek this clarification," Hastings told analysts on a conference call.