Netflix's debacle continues: Fourth quarter outlook horrid

Netflix's debacle continues: Fourth quarter outlook horrid

Summary: Customers are dropping Netflix's DVD service en masse and the exodus is killing the company's fourth quarter outlook.

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Netflix acknowledges that it screwed up with a proposed breakup of its DVD-by-mail and streaming services. The company also admits it shocked users with its pricing changes. But Netflix couldn't have forecast the customer fallout as its churn rate spikes to historically high levels.

Simply put, Netflix's outlook for the fourth quarter is a debacle of epic proportions. Meanwhile, Netflix delivered a domestic churn rate of 6.3 percent, up from 4.2 percent in the second quarter. Historically, Netflix churn has been between 3.8 percent and 4.5 percent.

Let's roll the outlook:

Jumping to the bottom line, Netflix's outlook is way short of Wall Street estimates. Netflix's earnings range for the fourth quarter is 36 cents a share to 70 cents a share. At the top end of Netflix's revenue range the company is projecting a best-case scenario of $875 million. Wall Street is expecting earnings of $1.08 a share on revenue of $919.6 million.

"We think DVD subscriptions will decline sharply this quarter due to price changes," said Netflix in an investor letter. Netflix added that it will offer an outlook for each of its units in the future. That move highlights how Netflix is trying to quarantine the limping DVD unit.

In other words, Netflix's financial picture for the fourth quarter is worse than the third quarter, which was no picnic, but better than feared. However, Netflix lost 810,000 domestic subscribers in the third quarter. Also see: Netflix subscribers down, Wall Street disappointed

Netflix shares fell 20 percent after hours.

Netflix reported third quarter earnings of $62 million, or $1.16 a share, on revenue of $822 million. Wall Street was looking for earnings of 94 cents a share on revenue of $811.6 million. In the third quarter, Netflix lost subscribers for the first time.

"We greatly upset many domestic Netflix members with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-now-canceled rebranding of our DVD service," said Netflix, who added the long-term streaming opportunity is compelling.

A look at Netflix's third quarter by the numbers:

  • 21.45 million: Domestic streaming subscriptions, which was lower than expected.
  • 13.93 million: DVD subscriptions.
  • 23.79 million: Unique domestic subscriptions, down from 24.59 million in the second quarter.
  • 810,000: Subscriber losses in the U.S.
  • 7 percent: Percentage of new members that choose a $15.98 DVD and streaming plan.
  • 11.8 percent: Operating margins for Netflix, down from 14.6 percent in the second quarter.

Related: Netflix's Qwikster retreat makes sense, but looks skittish

Topics: Banking, Enterprise Software

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26 comments
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  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Is it just me or are all of these segments increasing?
    jasqid
    • RE: Netflix's debacle continues: Fourth quarter outlook horrid

      @jasqid IT's just you.
      FireThorn
    • RE: Netflix's debacle continues: Fourth quarter outlook horrid

      @jasqid We're looking at the range they expect to hit as opposed to the movement from quarter to quarter.
      tobja
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Netflix won't get well anytime soon. I dropped them several months ago. They went from being a company I liked to one I will never go back to. It wasn't just a financial miscalculation by Netflix, it was a toxic slap in the face to their customers.
    M.M.Grimes
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Well... to Jobs' point... this is what happens when a salesperson tries to run what [i]was[/i] a good company
    UrNotPayingAttention
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

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    larkforsure
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    More corporate arrogance. The ceo should be fired. The greed here in America is disgusting. It's not good enough to be successful. You have to really push the bar and keep sticking to customers for more and more profit every quarter.
    FireThorn
    • RE: Netflix's debacle continues: Fourth quarter outlook horrid

      @FireThorn

      Why? He delivered higher profits than Wall Street was expecting. In a few quarters they likely be growing the number of users and still very profitable.
      Regulator1956
      • RE: Netflix's debacle continues: Fourth quarter outlook horrid

        @Regulator1956 <br>fourth quarter is 36 to 70 a cents a share.<br>Wall Street is expecting earnings of $1.08 a share.<br><br>Hmmm, looks like they missed Wall Street's expectation if you ask me.<br>NetFlix was a rocket in this fast growing industry and because of a poorly thought out strategy that showed complete ignorance of their own user base by their CEO they are now in a tail spin. They have left a bad taste in many peoples mouths, just as the competition is coming in to challenge. This was not a bad turn of events, this was very poor leadership and planning. He should be shown the door.
        KBabcock75
    • RE: Netflix's debacle continues: Fourth quarter outlook horrid

      @FireThorn

      Hey, the NetFlix CEO was simply trying to put himself in the Leo Apotheker/Darwin Awards contention. Give him a break!
      PMC-CON
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Reed Hastings lost $35 million yesterday, I'm pretty sure he would regard that as sharp slap on the wrist. All in all, he's lost more than $200 million in the value of his Netflix stock this year due to his own stupidity.
    terry flores
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Wow, and this is the company that killed Blockbuster? Can we officially classify it as a murder-suicide?
    dsf3g
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    I think they are getting what they deserve. The CEO is an arrogant person that THOUGH he knew it all. I hope to see him get fired soon. By my calculations since their stock high, their stock has dropped a total of around 76% in value. For once us "self-absorbed" Americans (as Hastings put it) have spoken out on corporate greed and arrogance.
    simpleone71
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Looking at the DVD P/L, this division is providing a huge chunk of the revenue, at the same time Notflix is trashing the DVD subscribers. If the average DVD subscriber is like me, I have about 100 DVDs with "availability unknown" status, although most are not new releases but disks that Notflix used to have, but due to losses and breakage, they no longer can ship. Surely Notflix could order replacements for disks that have at least 10 subscribers waiting for a title, with little loss to the revenue. But no, they are trying to enter a market where content is held hostage and they have little bargaining power. My loyalty to Notflix is gone -- if Amazon could offer similar streaming of foreign and older movies, I would dump Notflix in a second, and go back to the local video specialty store where at least they stock DVDs that are in demand.

    What a train wreck this NOtflix has become! Guess too much snorting and hot-tubbing by the execs has warped their senses. Just go away quickly, Notflix, and leave the job to someone who can handle it. (My experience with Kindle and Amazon shows they actually understand customers, and would do very well serving the notflix market.)

    Please notflix, go away quickly!
    zdnet@...
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    It is good to see consumers sticking to their principals and dropping companies that try to take advantage of their customers. This is how you teach corporations a lesson, by showing them that customers, not shareholders, are who matter the most!
    ctleng76
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    CEO deserves to be fired. This was totally mishandled ... what a bunch of boneheads. They do have real problems with content licensing coming up, how should they have handled it? Here is what I would have done:
    1. Put pricing model exactly at what they did 8.00 for each service.
    2. Make a Hybrid option, $10 for 1 DVD per month plus x hours (maybe 5) of streaming content per month. The x hour adder could be added to any DVD plan for $2 per month.
    3. Implement a pay per view/rental type agreement for the content they cannot get for streaming now (i.e, Amazon / Zune / Apple / cable model).

    There would have been a minimal increase, if any, for DVD users plus they still would have been able get people used to some downloadable content as the future moves on. The customer would have upgraded if they found they were wanting more than 5 hours per month.

    The rental option would allow Netflix to get more content sooner (same time as PPV on cable or iTunes and Xbox).
    Redhooker
  • Netflix's leadership failings

    A lot of people, including me, felt vindicated by the recent "Qwikster reversal" news, but it was a rather hollow victory. I for one would rather the whole mess had been avoided - such a waste.

    In addition to chatter about the reversal itself, there was some discussion about the tenor of Hastings' latest message, especially in contrast with the 9/18 communications. Regardless of your perspective on which approach was better, the lack of consistency in voice and approach - in fact the consistent inconsistency in communication in general - undermines people's ability to trust what Hastings says, and by extension trust what he and Netflix will do.

    On the one hand it's good that they listened (judging by the latest news it seems they didn't have a choice), but on the other it's not very clear that they've learned from their mistakes. The saga continues...

    I wrote about Netflix's leadership failings, as well as Facebook's, in the blog post below:

    http://www.gcdel.org/2011/09/8-lessons-in-digital-era-leadership-from-netflix-and-facebook-what-not-to-do.html

    Courtney Shelton Hunt, PhD
    Founder, Global Center for Digital Era Leadership (GCDEL)
    cshunt312
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    Reed Hastings poked the badger. Now it will rip his company apart.
    dbstephens
  • Contrarian.

    I will stick with Netflix to the bitter end!
    MSFTWorshipper
  • RE: Netflix's debacle continues: Fourth quarter outlook horrid

    What a great game plan, dominate your market, infuriate your customers, offer an apology but no correction, and watch it all go down the toilet. A hearty well done. Enjoy those margins.
    HRobin1455