Subscribers drop Netflix; revenue falls

Netflix Inc., the largest online DVD rental company, reported its first-ever quarterly drop in subscriptions and missed Wall Street revenue targets in the face of fierce competition from Blockbuster Inc.

The company also cut its forecasts for subscribers, revenue and profit for the year Monday.

Netflix stock closed the regular trading session 12% lower after the company cut prices on two of its subscription plans, then fell 4.5% further in extended trading.

Net income for the second quarter was $25.6 million, or 37 cents a share, compared with $17 million, or 25 cents, a year earlier, boosted in part by a $4.1-million settlement of a patent dispute.

Revenue rose 27% to $303.7 million, from $239.4 million in last year’s second quarter but finished behind analysts’ average expectation of $307.8 million, according to Reuters Estimates.

Analyst Michael Pachter of Wedbush Morgan Securities, who has a “sell” rating on Netflix, said the company “pretty much announced last quarter that Blockbuster was hurting them” but appeared to have cut marketing spending in the quarter.

“If they don’t spend money on marketing, they are delusional if they think it’s going to attract millions of subscribers,” Pachter said. “It looks like they are trying to ... essentially wait it out until Blockbuster raises prices.”

The Los Gatos, Calif.-based company, which pioneered online DVD rental, said its net subscriber base dropped to 6.74 million from 6.8 million in the first quarter.

Netflix now expects to end the year with 6.8 million to 7.3 million subscribers, down from a previous forecast of 7.3 million to 7.8 million.

The company dropped its revenue expectation to $1.17 billion to $1.19 billion from $1.21 billion to $1.26 billion, and reduced its net income outlook to 62 cents to 76 cents a share from 76 cents to 83 cents.

Netflix has spent the last six months fending off a heightened challenge from Blockbuster, which said it would spend $170 million this year to promote its Total Access plan, which allows subscribers to swap DVDs rented online at its stores free.

On Sunday, Netflix cut prices for two of its most popular plans to bring them in line with Blockbuster’s online-only rental plan, which had been $1 cheaper.

For the quarter, the rate of churn, or subscriber cancellations, rose to 4.6% from 4.3% for the second quarter of 2006.

Subscriber acquisition costs rose to $44.02 from $43.95 in the same period of 2006.

The company reported stock-based compensation costs of $2.8 million for the second quarter, compared with $3.1 million in the same period last year.

Shares of Netflix were down 4.5% at $16.50 in extended trading after closing down $2.36, or 12%, at $17.27 in regular trading Monday.