Netflix tests investors’ risk appetite as signups fall short

Fireside Chat

With yesterday’s results, Netflix abandoned the traditional earnings conference call, where analysts and investors ask questions of management.

Instead, the company held a video interview on Google Inc.’s YouTube, which Hastings said was modeled on fireside chats. Rich Greenfield, an analyst with BTIG LLC, and Julia Boorstin, a CNBC reporter, taking questions from investors, grilled Netflix executives on why they don’t report viewership numbers for original shows or subscriber cancellations.

The executives, including Hastings, Chief Financial Officer David Wells and Ted Sarandos, chief content officer, said they had no plans to change the reporting policies.

“We’re continuing to expand originals because they’re working for us, they’re working for our members,” Hastings said. He also suggested Netflix would own content in the future, similar to Time Warner Inc.’s HBO.

The company will begin offering individual profiles for family members this quarter, according to the statement.

Net Income

Second-quarter net income rose almost fivefold to $29.5 million, or 49 cents share, from $6.16 million, or 11 cents, a year earlier. Analysts had forecast 40 cents, the average of 25 estimates.

Sales increased 20% to $1.07 billion, matching estimates, from $889.2 million a year ago. Netflix charges $7.99 a month for its Web service.

Net income this quarter will be $18 million to $34 million, or 30 cents to 56 cents a share, the company said. Analysts predict profit of 43 cents on revenue of $1.1 billion.

Netflix forecasts 690,000 to 1.49 million new domestic streaming customers in the current third quarter, according to the statement. Analysts, on average, project 1.1 million. The company expects sales of $693 million to $701 million and profit of $161 million to $171 million for the domestic Web business.

For its international streaming business, Netflix forecasts revenue of $170 million to $184 million, and a loss of $70 million to $86 million, according to the statement.

Netflix added 610,000 international subscribers during the second quarter to bring the total to 7.75 million. DVD customers shrank by 470,000 to 7.51 million.

The disappointing number of U.S. signups casts doubt on Hastings’s so-called “virtuous cycle” in which subscriber additions fund ever-increasing program spending, in turn attracting even more users, said Paul Sweeney, Bloomberg Industries’ media analyst.

“If sub growth slows or worse, this virtuous cycle can become more of a vicious cycle,” Sweeney said.

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