Netflix Loses Customers, Remains Profitable

In a refreshingly honest letter to shareholders, Netflix today announced its 3rd quarter financial results. Revenue was up and met expectations, but the recent “PR storm” the company has brought on itself cost it 800,000 subscribers.

Netflix faced up to the issues it created this quarter when it abruptly raised prices significantly and then announced it would split its streaming and DVD services. (The company cancelled the services split but has kept the price increase in place.) Customers were upset and more dropped their subscriptions than had been expected. The letter acknowledges that these moves “hurt our hard-earned reputation, and stalled our domestic growth.”

Despite the jolt to its brand, domestic revenue was US$799 million, up 44% compared to this quarter last year. The company’s 15% operating margin also managed to beat The Street’s 14% expectations.

U.S. subscribers in the 2nd quarter totaled 24.59 million. In the 3rd quarter the total was 23.79 million unique subscribers, with 21.45 million subscribing to streaming and 13.93 million subscribing to DVD services. Netflix sees it’s future as a streaming service. With over 90% of its existing customers using that part of the business and only 7% of new subscribers opting for DVD services, it’s easy to see why.

Netflix is set to expand to the UK and Ireland early in 2012, but will then take a hiatus from international expansion until it recovers from the expected hit to profitability that expansion will incur. The company’s current international markets of Canada and Latin America are still in early development and are considered growth opportunities over the next couple of years.