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Netflix Shares Drop 28 Percent on News of Lower Profits and Higher Acquisition Costs

15 Jul, 2004 By: Holly J. Wagner

Shares of Netflix lost 28 percent in after-hours trading Thursday and regular trading Friday after the company announced that profits slipped on expensing stock options and that subscriber acquisition costs would be higher than anticipated for the second half of the year.

Netflix shares closed at $32 Thursday, but dropped to $27.10 in after-hours trading and by Friday, closed at $23.02.

In the company's second-quarter financial call, executives said the leading online rentailer's subscriber acquisition costs would climb from an anticipated $35 per subscriber to between $37 and $39 each for the balance of the year, owing to increasing cost of online advertising and of moving from targeted local TV advertising to national cable ads.

Also putting drag on the quarter was the hangover from a $2 per subscription price hike. CEO Reed Hastings said the company expected to feel the full brunt of cancellations when the price increase took effect, but now expects that impact to carry into the third quarter.

On a positive note, Hastings said Netflix has felt no appreciable impact from the launch of Blockbuster's in-store subscription program in May.

“We have yet to see any impact from their subscription service,” he said, noting that markets with the Big Blue subscriptions are tracking comparable to markets like Boise and Albuquerque, where Blockbuster franchisees have not implemented subscriptions.

“Over time, of course, we do expect some impact. But if it was going to be large, we would have already felt it,” Hastings said.

The company plans to launch in the United Kingdom late this year and expects to lose $5 million per quarter on that launch in the second half of this year, CFO Barry McCarthy said.

Revenue for the second quarter was $120.3 million, up 90 percent compared to $63.2 million for the second quarter of 2003, and up 20 percent compared to $100.4 million for the first quarter of 2004. Net income for the second quarter was $2.9 million, or a profit of 4 cents per diluted share, compared to $3.3 million, or 5 cents per diluted share, for last year's second quarter and a net loss of $5.8 million, or 11 cents per share, for the first quarter of this year.

Netflix ended the second quarter of 2004 with 2,093,000 subscribers. During the quarter, Netflix acquired 583,000 free trial subscribers, a 78 percent year-over-year increase from the 327,000 trial subscribers acquired in the second quarter of 2003 and a decline of 23 percent from the 760,000 new trial subscribers acquired in the first quarter of 2004.

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