By MICHAEL LIEDTKE, Associated Press
SAN FRANCISCO (AP) — Netflix's comeback from a customer backlash accelerated during the first quarter, but the recovery wasn't impressive enough to ease more pressing concerns about the Internet video subscription service's ability to cope with tougher competition.
Wall Street's worries about the challenges facing Netflix Inc. crystallized Monday with the release of the company's first-quarter results and forecast for the upcoming months.
The company, which is based in Los Gatos, Calif., posted its first quarterly loss in seven years during the three months ending in March. The setback, though, was far smaller than analysts anticipated.
Instead of celebrating several positives contained in the report, skittish investors keyed on a second-quarter forecast that calls for a slowdown in subscriber growth during the spring and early summer. The April-to-June period has historically been a sluggish period for Netflix because more daylight and warmer weather tends to discourage people from staying inside to watch movies and old TV shows.
That's the main reason Netflix cited for its prediction that its service for Internet video streaming might add as few as 200,000 U.S. subscribers in the second quarter after gaining 1.7 million customers in the first three months of the year.
At most, Netflix is hoping to add 800,000 video streaming subscribers in the U.S during the second quarter. That would still be less than the 1.8 million streaming customers that Netflix picked up in last year's second quarter. It's also less than the increase of 1 million subscribers registered in the second quarter of 2010.
Netflix says the comparisons to its subscriber numbers from past second quarters are no longer an accurate barometer because the company has become more susceptible to seasonal swings as its audience has swelled. Management says Netflix is more likely to experience more cancellations in the spring and more new customers to sign up during the final three months of the year.
But Investors instead seemed to interpret the projection for this year's second quarter as a sign that Netflix will have a more difficult time attracting new subscribers as more alternatives emerge for Internet video streaming, including services from bigger companies, said Raymond James analyst Aaron Kessler.
Amazon.com Inc., Wal-Mart Stores Inc.'s Vudu and Comcast Corp all offer video streaming options. Verizon Communications Inc. is preparing to launch a service in a joint venture with Coinstar Inc., the owner of Redbox kiosks that rent DVDs in thousands of stores across the U.S.
"I don't think anyone is ready to give Netflix the benefit of the doubt at this point," Kessler said.
Netflix shares plunged $16.94, or nearly 17 percent, to $84.90 in Monday's extended trading.
In a conference call, Netflix CEO Reed Hastings urged investors to focus on the bigger picture. He predicted the company will add about 7 million streaming subscribers in the U.S. for all of 2012. That would be about the same number that Netflix attracted in 2010 — the company's biggest growth year so far.
"Everyone is realizing that consumers want 'click and watch' on-demand" video, Hastings said. "We have been focused on this market for a very long time and have some substantial advantages because of that."
Monday's sour reaction on the stock market contrasted to the ebullience that prevailed when Netflix released its last quarterly report in late January. Investors were enthused then because the report showed Netflix had added about 600,000 U.S. subscribers during the final three months of last year.
Those subscriber gains were hailed as a sign that Netflix was well on its way to repairing the damage caused last summer when the company abruptly raised its prices by as much as 60 percent for customers who want to rent DVDs through the mail as well as stream video over the Internet.
The higher prices irked subscribers, causing Netflix to lose 800,000 U.S. customers from July through September.
Netflix fared better during the first three months of this year as it picked up 1.7 million subscribers to end March with 26.1 million U.S. subscribers. The growth hit the high end of Netflix's forecasts.