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Netflix's Q1 expected to include rare loss

Fri, 04/20/2012 - 1:58pm
The Associated Press

Netflix is expected to report its first quarterly loss in seven years when the video subscription service releases its results for the first three months of the year.

The numbers, due out after the stock market closes Monday, are also likely to show that Netflix now has far more U.S. subscribers than the company did last summer before sharp price increases triggered a tidal wave of customer cancellations.

Netflix lost 800,000 U.S. subscribers from July through September, then bounced back to add 600,000 customers in the final three months of last year.

Analysts suspect the subscriber growth may have accelerated during the first quarter, partly because the customer outrage had died down, but also because Netflix has been advertising its Internet video streaming service more aggressively.

The company began this year with 24.4 million U.S. subscribers who paid for the streaming service, a DVD-by-mail rental plan or both products. Another 1.9 million customers outside of the U.S. paid for the streaming service.

Investors are more likely to focus on the magnitude of the latest subscriber gains than the financial losses, which Netflix management forecast would occur through most of this year as the company recovers from the customer backlash, pays for its expansion outside of the U.S., and spends heavily to secure the rights to stream more movies and old TV shows.

At least two analysts, Michael Pachter of Wedbush Securities and Arvind Bhatia of Stern Agee, believe there is a good chance that Netflix's loss won't be as large as the $16 million setback that Wall Street is anticipating. Netflix's own projection in January was imprecise, leaving room for a loss of anywhere from $9 million to $27 million.

Pachter and Bhatia expect that rapid subscriber growth will shrink the size of the first-quarter loss and possibly enable Netflix to generate revenue above analysts' estimates. If that happens, Netflix's stock could react positively, even though it will mark the first time that the company has lost money since the first quarter of 2005.

But deeper trouble looms ahead, according to Pachter and Bhatia.

Pachter says Netflix will have to continue to increase its marketing budget to attract more subscribers in the face of increased competition and to overcome the recent loss of a licensing deal to stream content from Starz Entertainment. The 3-year-old Starz deal expired Feb. 29, depriving Netflix's Internet video library of some of its most popular fare.

Bhatia is worried about the steadily rising bill to license online video. He expects Netflix's licensing costs to rise 38 percent this year after climbing 55 percent last year.

While Netflix builds up its Internet video service, the company is phasing out the DVD-by-mail plans that established it as a household name.

After losing 2.8 million DVD customers during the final three months of last year, Netflix predicted another 1.5 million DVD subscribers would drop off in the first quarter. The company entered the year with 11.2 million DVD customers, including 8.4 million who also paid for Internet streaming.

Analysts polled by FactSet expect a loss of 27 cents per share on revenue of $867 million.

Netflix earned $60 million, or $1.11 per share, on revenue of $719 million at the same time last year.

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