Despite lots of angry subscribers, Netflix grew revenue in Q3

Netflix CEO Reed Hastings

In the wake of consumer backlash over a controversial change in pricing, revenue and profits were up for Netflix Inc. in the third quarter.

But the company also reported a decline in domestic subscribers of 3.3%, or 805,000, to 23,789,000 in Q3 from 24,594,000 in Q2.  Investors jumped on that troubling fact and sent the price of a share of Netflix stock sliding by more than 20% to $95.50 in afterhours trading.

For the quarter ended Sept. 30, Netflix, No. 13 in the Internet Retailer Top 500, reported:

• Revenue increased 48.6% year over year to $822.0 million from $553.2 million.
• The total number of subscribers increased 49.2% to 25,269,000 from 16,933,000 in the third quarter of 2010.
• The total number of U.S. subscribers grew 41.6% to 23,789,000 from 16,800,000.
• The total number of international subscribers increased 1013% to 1,480,000 from 133,000.
• Net income increased 64.6% to $62.4 million from $37.9 million.

The third quarter was a tough one for Netflix after the company announced—and then quickly reversed—a decision to split into two separate units. In a terse posting on the Netflix corporate blog Oct. 10, CEO Reed Hastings said Netflix was canceling plans to remake Netflix into two divisions and rename its DVD and Blu-ray disk rental program as Qwikster

The company is bracing for more angry consumer reaction to its decision in July to eliminate a combination DVD-by-mail and unlimited streaming rental plan priced at $9.99 in favor of offering consumers the option to subscribe to either format for $7.99 each.

“We greatly upset many domestic Netflix members with our significant DVD-related pricing changes and to a lesser extent with the proposed and now canceled rebranding of our DVD service,” says Hastings. “In doing so we’ve hurt our hard-earned reputation and stalled our domestic growth.”

 For the first three quarters:

• Revenue increased 47.8% year over year to $2.32 billion from $1.57 billion.
• Net income increased 67.8% to $190.9 million from $113.8 million in the first three quarters of 2010.

Although sales and profits have grown for the year to date, Netflix is anticipating a tougher fourth quarter, says Hastings. “We think DVD subscriptions will decline sharply this quarter due to our price change,” he says.

In Q4, Netflix projects revenue to range from $841 million to $875 million and net income from $19 million to $37 million.