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Netflix Q2 Earnings Overshadowed By Pricing Backlash

THE CANADIAN PRESS -- SAN FRANCISCO - Netflix Inc. is bracing for customer backlash that could result in its slowest subscriber growth in more than three years amid changes to its online video and DVD rental service that will raise prices by as much as 60 per cent in the United States

The sobering forecast issued Monday overshadowed the second-quarter earnings that accompanied the company's outlook.

Netflix's shares plummeted more than 10 per cent, largely because the company expects its results for the current quarter ending in September to miss the targets set by stock market analysts.

The shortfall stems from an anticipated slowdown in Netflix's subscriber growth amid the most radical change in the company's pricing since it began renting DVDs through the mail 12 years ago.

Instead of offering packages that combine DVD rentals and Internet-delivered video for a single price, Netflix informed subscribers two weeks ago that it would sell the two entertainment options as separate plans.

The change means customers will have to pay substantially more if they want to get both DVDs and Internet video from Netflix. For instance, a bundled plan that had been priced at US$10 per month will now cost $16 per month, beginning Sept. 1, for existing U.S. customers. The prices of other popular bundled plans will rise by 20 per cent to 33 per cent.

The price increases don't apply to Netflix Canada.

Netflix expects most customers to pick between the DVD or streaming plan to avoid getting hit with a higher bill if they subscribe to both plans. The company said it anticipates another group of subscribers is so infuriated with the rate changes that they will stop being customers entirely.

Management didn't estimate how many subscribers will cancel, but a large customer exodus appears to be factored into the company's forecast for the current quarter.

Netflix expects to add as few as 190,000 subscribers or as many as 1.29 million subscribers in the current quarter. Either figure will be a falloff from the 1.9 million subscribers added in the April-June period to propel Netflix's total customers to nearly 25.6 million. In last year's third quarter, Netflix added nearly two million subscribers.

If the growth falls on the lower end of the range, it would represent the lowest number of subscribers that Netflix has picked up during a three-month stretch since the second quarter of 2008 when it added 168,000 customers. Back then, Netflix only operated in the U.S. It now has one million Canadian customers who subscribe to the Internet streaming service. The company plans to expand into Latin America later this year.

"We hate making our subscribers upset with us, but we feel like we provide a fantastic service," Netflix CEO Reed Hastings wrote in a letter announcing the second-quarter results and forecast.

Netflix earned US$68.2 million, or $1.26 per share, in the most recent quarter. That marked a 57 per cent increase from $43.5 million, or 80 cents per share, at the same time last year.

Revenue climbed 52 per cent from the same time last year to $789 million.

The earnings per share were well above the average estimate among analysts surveyed by FactSet. The revenue fell about $2 million below analyst forecasts.

Investors though were more concerned about management's third quarter forecast. That calls for Netflix's earnings per share to range from 72 cents to $1.07 per share on revenue of $800 million to $829 million. Analysts had projected earnings of $1.11 per share on $845 million in revenue.

Netflix shares plunged $28.89 to $252.64 in Monday's extended trading.

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