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Netflix Not Immune to Economic Woes

By Erik Gruenwedel | Posted: 06 Oct 2008

Online DVD rental pioneer Netflix Oct. 6 revised downward subscriber growth estimates for the fourth quarter after third-quarter (ended Sept. 30) results fell just below expectations.

The news sent shares of Los Gatos, Calif.-based Netflix down $2.48 (8.5%) to close at $26.49.

It marked the first downturn for the DVD-by-mail service, which analysts consider a less expensive entertainment alternative to theatrical movies and thereby nearly immune to shortfalls in the economy.

Downturns in the economy, sparked by credit, mortgage and banking concerns, have seen shares of many media companies fall more than 10%.

Netflix said it closed Q3 with 8.672 million subscribers, down slightly from guidance of 8.675 million to 8.875 million. It said total subscriber estimates for Q4 would range from 8.95 million to 9.25 million compared to previous estimates from 9.1 million to 9.7 million.

Fourth-quarter revenue guidance declined from $4 million to $8 million ($353 million to $359 million) compared to previous estimates from $357 million to $367 million.

“Net subscriber growth in July was in line with expectations but August was unusually weak,” said CFO Barry McCarthy, in a statement. “In September, the business regained momentum with results slightly below original expectations, likely due to the economic climate.”

Analyst remained only mildly concerned, characterizing Netflix as an entertainment antidote to cash-strapped consumers. J.P. Morgan analyst Barton Crockett, in a research note, called the news an “incremental negative for the bull-case on Netflix shares.”

Stacey Widlitz, media analyst with Pali Research, said consumer cutbacks were unsurprisingly affecting Netflix, which she said continued to meet its financial goals by cutting back on subscriber acquisition costs (SAC).

The analyst said home video rental would continue to hold up despite the economy, especially if Blockbuster continued to focus on its store-based business plan.

“So long as Blockbuster continues to focus its resources on its store base and not its online program, this should be the company’s primary lever,” Widlitz said in a note.

Netflix reports third-quarter results Oct. 20.


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