Netflix subscriber growth stagnates for 2012

Michelle Clancy | 25-10-2012

Netflix delivered better-than-expected revenue growth for the third quarter of 2012, but saw a precipitous drop in profit and reduced subscriber growth, sending stocks skittering down more than 11%.

Revenue rose to $905.1 million, up 10% from a year ago, but the online streamer reported a massive 88% drop in its third-quarter net income, coming in at just $7.7 million for the quarter ended Sept. 30. That's down from $62.5 million one year earlier. The culprit is higher content costs and ongoing international expansion.

In the third quarter, the company added 2 million members to total 29 million globally. In the U.S., subscribers to Netflix streaming subscriptions grew to 25.1 million, up more than 20% from a year earlier. However, it revised its Q4 guidance, saying that it now expects to add 4.73 million to 5.43 million customers in the U.S. for the year, down from its previous guidance of 7 million.

Some analysts feel that taking more market share is too lofty of a goal for the company. "Netflix believes it can ultimately penetrate 50 to 75% of all U.S. homes," wrote Tim Nollen of Macquarie Capital. "We find this extraordinarily optimistic, and we believe the guidance reduction for Q4 bodes ill."

Wedbush Securities analyst Michael Pachter said in a report that Netflix has somewhat hit a wall when it comes to finding new growth in the U.S., having tapped out the mobile and gaming console embedded device opportunity—next month's Wii U console launch will be "inconsequential," he noted. There are, he said, few other growth mechanisms for the service.

Netflix also projected $931 million for fourth quarter revenue, down from consensus estimates of $944 million.

The company's shares were trading at $60.50 at midday Wednesday, down about 11% from the previous day's closing price.