-- Slated to report results after closing bell Monday -- 3Q profit seen by analysts as 96 cents a share on revenue of $813 million -- But price changes, Qwikster plan, other moves seen having soured investors By David B. Wilkerson After a period marked by a torrent of bad news, analysts are anxious to see if Netflix Inc. (MFLX) can regain its footing with angry customers and investors when it reports third-quarter results early next week. Netflix is slated to report its results after the closing bell Monday. Analysts polled by FactSet Research are expecting, on average, a third-quarter profit of 96 cents a share on revenue of $813 million. That compares with earnings of 70 cents a share on sales of $553.2 million for the same period last year. But the results will only be a small part of the story. Investors have soured on Netflix since the company announced a series of price changes on July 12 that effectively raised fees by 60% for customers using its combination DVD-and-streaming video plan. That move was compounded last month when the company announced that it was splitting its DVD and streaming businesses into separate entities--with separate websites--with the DVD-by-mail business to be renamed as Qwikster. The company backed away from that plan a few weeks later. Netflix also lowered its subscriber forecast by 1 million for the period, reflecting the negative effect of the price changes. As a result, Netflix shares have plunged 62% since July, sliding from an all-time high of $300 to its current closing price $111.48 Thursday. "We view the 60%-ish correction in Netflix shares as excessive, although the negative investor and consumer reactions to the company's fee hikes and business splits are understandable," Citigroup Inc. analyst Mark Mahaney wrote in an earnings preview on the company. In July, Netflix announced that it would raise the price for a combination DVD-and-streaming video plan to $15.98 from $9.99 a month. Chief Executive Reed Hastings said he expected some negative reaction, but believed the popularity of the company's streaming-only option would allow it to increase the fee for the combo plan. However, consumers were angrier than Netflix anticipated. In mid-September, it warned that it would generate about 1 million fewer subscribers than it expected when it gave its initial forecast in July. Analyst John Blackledge at Credit Suisse said he expects a "solid" third quarter for Netflix, and said that although subscriber cancellations will be up in the early part of the current quarter, the rate of customers who drop the service will "moderate" as the period wears on, and into 2012. "Additionally, we think Netflix should benefit from the seasonal trend of new consumer devices ... and further new streaming content," he wrote. In recent days, Netflix has announced deals with the CW television network and DreamWorks Animation SKG Inc. (DWA), with more agreements widely expected in the near future. The company has existing agreements with Walt Disney Co. (DIS), CBS Corp. (CBS), Twentieth Century-Fox, Miramax, AMC Networks Inc. (AMCX) and several other studios and networks. Fox is owned by News Corp. (NWSA), which also owns Dow Jones, the publisher of The Wall Street Journal and this newswire. Meanwhile, Wedbush Securities' Michael Pachter said he expects the company to issue a fourth-quarter earnings estimate "well below" the analyst consensus of $1.11 a share, and to provide "less detailed forward guidance and summary results." Pachter reiterated his neutral rating on the shares. Hudson Square Research analyst Daniel Ernst, who upgraded Netflix to hold from sell earlier this month, told clients that while the company will need to work at regaining customer appreciation, "the service remains a compelling consumer value ... and potential competitors have yet to offer a meaningful alternative." Amazon.com Inc. (AMZN) has been rapidly beefing up its online streaming offering, forging a high-profile deal with Fox in September, and Hulu's co-owners, including Disney, Comcast Corp. (CMCSK) and News Corp., opted last week to pull that video website off the selling block, signaling that they intend to keep as much control of online entertainment as they can while picking up additional revenue from Netflix and its rivals. Netflix was also hurt in September by news that Starz LLC (LSTZA) walked away from talks to extend its licensing deal with Netflix. Starz holds the online and Pay-TV rights to films owned by Sony Corp. (SNE) and Walt Disney Co. Investors sensed that content costs would increasingly be a problem for Netflix. Before the month ended, Netflix said it would spin off its DVD unit into a separate entity called Qwikster while retaining the Netflix brand for the streaming product , a move many analysts found baffling enough to be compared with Coca-Cola Co.'s (KO) New Coke debacle of the 1980s. On Oct. 10, Netflix reconsidered the move, and said the DVD and streaming businesses would remain together under the original brand. -By David B. Wilkerson; 415-439-6400; AskNewswires@dowjones.com
