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Netflix Adds 3 Million Subs, Posts $59 Million Profit — But Stock Nosedives

15 Oct, 2014 By: Erik Gruenwedel

Stock plummets 25% in aftermarket trading on lower-than-expected subscriber adds and news of pending HBO OTT service

The Netflix juggernaut may continue to fire on all cylinders, but increased competition and soft subscriber additions have spooked investors.

Netlfix posted third-quarter (ended Sept. 30) net income of $59 million, up 78% from net income of $32 million during the prior-year period. Revenue topped $1.2 billion, up nearly 36% from revenue of $884 million last year.

Netflix said its by-mail disc rental business added $89 million in contribution profit on about 6 million members. While its legacy by-mail disc business lost 1.1 million subs year-over-year, it still represented almost 48% of the SVOD's operating profit.

The SVOD pioneer added 3 million net subscribers to top 53 million globally, including 980,000 new additions domestically. The U.S. subscriber additions were below projections and the prior-year period.

Internationally, Netflix added 2 million members to end the quarter with less than 16 million. Again, the additions were below market expectations. The results included less than a month of Netflix’s recent six-country expansion in France, Germany, Belgium, Luxembourg, Switzerland and Austria.

In the quarterly shareholder letter, CEO Reed Hastings and CFO David Wells speculated that positive reaction to the second season of original programing “Orange is the New Black,” offset slightly negative reaction to the $1 monthly price hike for new members.

“In hindsight, we believe the late Q2 and early Q3 impact of higher prices appeared to be offset for about [only] two months by the large positive reception to season two of ‘Orange,’” Hastings and Wells wrote.

Netflix ended the quarter with $8.9 billion in third-party content obligations, up 37% from obligations of $6.5 billion last year.

In response to HBO’s Oct. 15 announcement that it would soon launch a standalone streaming service, Hastings and Wells reiterated that HBO has been Netflix’s primary competition since 2011. The executives said that many people subscribe to both services and that HBO’s OTT video service shouldn’t upset the competitive landscape.

“The competition will drive us both to be better,” they wrote.

Investors didn’t seem to agree, sending Netflix shares down more than $114 dollars (25%) in after-market trading.

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