Netflix Reports Mixed Third Quarter Results, Ugly Fourth Quarter Guidance

Shares of Netflix NFLX are plunging more than 25 percent in Wednesday's after-hour trading session after the company reported third quarter results and offered fourth quarter guidance. Netflix earned $0.96 per share, representing a three cent per share beat. Revenue of $1.41 billion represents a 27.0 percent increase from last year and was in-line with the consensus estimate. During the quarter, the company added 3.02 million subscribers, below prior guidance of 3.69 million additions. The reason for the shortfall, according to the company, was higher subscription prices. In hindsight, we believe that late Q2 and early Q3 the impact of higher prices appeared to be offset for about two months by the large positive reception to Season Two of Orange is the New Black,” the company stated in a press release. “We remain happy with the price changes and growth in revenue and will continue to improve our service, with better content, better streaming and better choosing.” At the same time, Netflix issued troubling fourth quarter guidance. The company expects its fourth quarter earnings per share to be $0.44 which may not compare to analyst estimates of $0.85. Revenue of $1.30 billion is also significantly short of analyst expectations of $1.49 billion. Netflix hopes to add an additional four million members in the coming quarter to end 2014 with over 57 million members globally. Netflix also disclosed that it will begin paying a higher VAT in most of Europe due to changes in European law as of January. The company intends to “absorb” these increases rather than pass on the additional fees to its clients. As such, Netflix expects a “slightly lower” international contribution margin and profit starting in the first quarter.