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VOL. 127 | NO. 143 | Tuesday, July 24, 2012

Netflix's 2Q Results Riding on Subscriber Growth

MICHAEL LIEDTKE | AP Technology Writer

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SAN FRANCISCO (AP) – Netflix will provide an update on the growing popularity of its Internet video service and the death march of its DVD-by-mail rental service Tuesday when the company releases its second-quarter earnings.

WHAT TO WATCH FOR: Investors' reaction to the results, due out after the stock market closes, is likely to hinge on whether Netflix Inc. was able to attract more online video subscribers than management projected a few months ago.

Netflix tried to set the bar low in April when it predicted it would add 200,000 to 800,000 U.S. customers to its service that allows subscribers to stream an unlimited amount video over high-speed Internet connections for $8 per month. That represented a modest goal, considering Netflix gained 1.7 million Internet video subscribers during the first three months of year.

But a tidbit that Netflix CEO Reed Hastings shared on his Facebook page earlier this month raised expectations. Hastings posted that Netflix's subscribers collectively watched more than 1 billion hours of video for the first time during June.

Although Hastings didn't provide any further detail, the statistic implied the usage of Netflix's Internet video library has increased significantly since the company last provided any viewership numbers six months ago. At that time, Netflix said subscribers had collectively streamed about 2 billion hours during the fourth quarter, which works out to an average of about 667 million hours per month.

Analysts have interpreted the latest viewership numbers as a sign that Netflix either hit the top end of its second-quarter goal for streaming subscribers or exceeded it. Investors have gotten their hopes up too. The company's stock closed last week at $81.82, a 20 percent gain from where it stood before Hastings posted the June streaming statistics.

Netflix began the quarter with 23.4 million streaming subscribers in the U.S. Another 3.1 million customers streamed in Canada, the United Kingdom and dozens of Latin American countries.

While it's been trying to build up its video streaming service, Netflix has been gradually phasing out the DVD-by-mail rental service that established the company as a household name. The company, which is based in Los Gatos, Calif., no longer wants to foot the bill for technology that it believes is doomed for obsolescence.

Netflix tried to split the DVD service into a separate business called Qwikster, only to reverse itself after customers complained bitterly about the change.

The company had predicted it would lose up to 1.1 million DVD subscribers during the second quarter to end June with about 9 million customers on that side of its operations. Netflix had 14 million DVD subscribers at the beginning of last fall.

Coming of a first-quarter loss, the expectations for Netflix's earnings are low. That's partly because Netflix has been spending heavily for the rights to stream more movies and TV shows over the Internet. As of March 31, Netflix had signed contracts that will require the company to pay $3.6 billion in licensing rights during the next five years, including $730 million by next April.

THE BIG PICTURE: Netflix is under pressure to maintain robust growth as it tries to fend off intensifying competition in the Internet video service and lure back investors who dumped its shares last year. The sell-off occurred after the company angered its U.S. customers last summer with price increases of as much as 60 percent.

Despite this month's rally, Netflix's stock price remains more than 70 percent below its peak reached before the price increase kicked in.

WHAT'S EXPECTED: Analysts polled by FactSet expect Netflix to earn 4 cents per share on revenue of nearly $890 million.

LAST YEAR'S QUARTER: Netflix earned $68.2 million, or $1.26 per share, on revenue of $789 million at the same time last year.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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