Shares of online DVD rental pioneer Netflix Inc. plunged more than 20% in after-hours trading Monday after the company reported earnings that topped estimates, but offered guidance that disappointed Wall Street amid escalating competition from Blockbuster Inc.
Netflix reported a second-quarter profit of $16.8 million, up from $5.7 million in the same quarter a year ago. On a per-share basis, the company earned 24 cents, shattering analysts’ estimates of 18 cents.
Revenue came in at $239.4 million, light of the $241.7 million analysts projected, but 46% higher than in the year-ago frame.
The company stuck by its full-year profit guidance of $30 million-$35 million, which, in light of beating estimates in the second quarter, investors seemingly took to mean that Netflix could underperform the rest of the year.
The company said it ended the quarter with 5.2 million subscribers, up 62% from the year-ago quarter, and up 303,000 in the latest quarter. CEO Reed Hastings noted that Netflix has doubled its subscription base in the past 18 months.
He also said that Blockbuster has begun advertising its competing service, Blockbuster Online, via “big” signs at its stores, which he called an “extraordinary situation,” because, in the past, Blockbuster has discouraged online renting while encouraging its bricks-and-mortar model. “They’ve definitely gotten religion,” he said.
He said Blockbuster Online’s aggressiveness will hasten a “tipping point,” where more stores will close thus driving more business online. He used the example of a Pittsburgh businessman recently shutting down his nine-store Blockbuster franchise.
Blockbuster’s fierce competitive battle might be taking a toll on Netflix, evidenced by the online firm’s subscriber-acquisition costs rising from $38.13 a year ago in the second quarter to $43.95.
Hastings ensured analysts during a conference call Monday that Netflix intends on being a leader in the delivery of digitally downloaded movies, though it’s a “minuscule” business now and has not even boasted much growth in three years. He said he’ll supply details of the company’s plan in that regard during subsequent earnings calls.
Chief financial officer Barry McCarthy said the company’s new initiative for selling advertising on the millions of envelopes the company mails to its subscribers has gone so well that inventory is sold out in the near term. Revenue and profit increases there will come from raising rates.
The company also has begun selling online ads at its site, and McCarthy said it will do so sparingly and only permit movie-related ads.
Shares of Netflix, which rose 3.1% to $23.76 during the regular session Monday, plunged after the bell, while Blockbuster shares rose more than 5%.