Netflix Q2 revenue close, but no cigar; Q3 is another (sad) story

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Netflix (NASDAQ:NFLX) mailed in a solid second quarter in terms of subscriber growth and profit, but it missed the revenue mark Wall Street expected by enough to send the stock down 10 percent in after-hours trading. The biggest culprit may have been the even weaker guidance the company issued for the third quarter.

Netflix

Netflix blamed fallout due to its decision to raise prices.

The company reported revenue of $788.6 million for the quarter, up 52 percent from a year ago, but below the $791.5 million expected. Profits were $68 million, up 55 percent, with EPS at $1.26, a 58 percent increase. Analysts expected EPS of $1.11.

The company reported 24.6 million domestic subscribers (25.56 million including Canada), roughly what Wall Street expected.

"It's too early to call on Netflix's future at this point. I have a 'sell' rating on the company based on its high valuation, but I'm not shorting it because it's still a great company," Brett Harriss, an analyst at Gabelli & Co., told Bloomberg. "There's just not enough margin of safety to buy it here."

The real worry, however, was its third quarter outlook (which it tried to soften with the pronouncement that the fourth quarter could be its first $1 billion quarter): the company said it expects sales up to $805 million, far short of Wall Street estimates of $845.3 million.

Netflix "came into the quarter as Superman and it looks like they ran into a little bit of kryptonite and lost some of their super power,"  Barton Crockett, an analyst with Lazard Capital Markets, told Bloomberg.

Netflix blamed fallout due to its decision to raise prices.

"Because of the timing of the price change, revenues will only grow slightly on a sequential basis," the company said. Netflix said the pricing change also would slow subscriber growth, but only for the third quarter.

Netflix expects to have 25 million domestic subscribers by the third quarter, with 12 million taking the hybrid service, 10 million choosing streaming only and 3 million subscribing to the DVD-by-mail service. It reported 75 percent of its recent subscriber gains were to the streaming only service.

As for its reason to move away from the DVD-by-mail business, the company pointed to slowing shipments in the second quarter, lower than expected for the quarter.

Surprisingly, CEO Reed Hastings said the company had spent less on streaming content that it had budgeted, although it spent more than it had in the previous quarter.

The company still has not reached a deal between Sony and Starz, which resulted in Sony pulling its movies from the service. The company said it was "hopeful" that a deal would be struck soon. Netflix continues to negotiate with Starz on its own agreement, which expires after the first quarter of 2012.

For more:
- see this earnings release
- see this Bloomberg article

See these related earnings stories:
Netflix integration with Facebook coming soon, but not to U.S. users 
Hulu Plus? Amazon Prime? HBO GO, DishOnline more worrisome to Netflix

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