Netflix Inc. warned Monday of continued steep declines in DVD subscribers this quarter and said a costly expansion into Britain and Ireland would push it into the red in the first quarter, walloping its shares.
The top video rental company reported a better-than-expected 49-per-cent surge in third-quarter revenue to $822-million (U.S.), surpassing Wall Street’s target of about $812-million.
But investors - mindful of how the company had driven away customers in recent months and damaged its credibility with an unpopular price hike and other high-profile stumbles - focused on the fourth-quarter warning.
Netflix shares plunged more than 26 per cent in after-hours trading.
“We expect the costs of our entry into the U.K. and Ireland will push us to be unprofitable on a global basis; that is, domestic profits will not be large enough to both cover international investments and pay for global G&A and technology and development,” chief executive officer Reed Hastings said in a letter to shareholders accompanying its quarterly report.
Mr. Hastings added that subscriber defections because of the price-hike should slow in coming quarters “as the price effect washes through.”
The company reported earnings per share of $1.16 on net income of $62-million.
Netflix's video subscription service lost 800,000 customers in the third quarter - the biggest exodus in its history.
The losses were larger than management had previously warned. The unwelcome surprise was compounded by a forecast calling for millions of Netflix Inc.’s DVD-by-mail subscribers to cancel the service in reaction to dramatic price increase that took effect last month.
The company, which is based in Los Gatos, Calif., ended September with 23.8 million U.S. subscribers, down about 800,000 from June. Netflix had predicted it would lose about 600,000 U.S. subscribers in a forecast released last month.
Management expects to gain U.S. subscribers in the current quarter, although Netflix didn't set a specific target. But a substantial number of Netflix's customers are expected to choose between renting DVDs through the mail or streaming video over high-speed Internet connections instead of paying for both services.
The biggest hit is expected on the DVD side, a service that Netflix has been de-emphasizing to save money on mailing costs as its spends more to license movies and TV shows for its Internet video library. The company expects its DVD subscribers to fall from 13.9 million as of Sept. 30 to as low as 10.3 million at the end of December.
With files from The Associated Press