The company logo is displayed at the entrance to Netflix Inc.'s headquarters… (David Paul Morris, Bloomberg )
Netflix Inc.'s high-flying stock dropped 10% in extended trading after the streaming video and DVD rental company acknowledged that a recently announced price increase would crimp its short-term growth.
Revenue in the second quarter ended June 30 and expected results for the third quarter that will end Sept. 30 were both below most Wall Street analysts' expectations, the Los Gatos, Calif., company said Monday. That led to a rare stumble in a blockbuster year during which Netflix's stock price had grown 60%.
In a conference call after the release of financial results, Netflix Chief Executive Reed Hastings defended his decision to raise prices for combined DVD-and-streaming plans by as much as 60%. Hastings said the increase would generate more revenue down the line that the company would spend to expand and improve its library of digital content.
That could help Netflix with the potentially pricey renewal of its deal with Starz, which controls the rights to movies from Sony Pictures and Walt Disney Studios. That agreement expires in early 2012.
Some long-term users have complained that there aren't enough new, high-quality movies and television shows on Netflix's streaming service. That's a growing concern for the company, particularly as it faces more competition from Amazon.com and HBO's digital offering, HBO Go.
In a letter to investors released along with the earnings, Hastings and Chief Financial Officer David Wells said Netflix's pain from the price increase would be felt sooner than the gain.
"In Q3 we will see only the negative impact of the pricing change, given that the announcement was early in the quarter and that the increases won't take effect until late in the quarter," the executives wrote.
Growth will return to its normal path in the fourth quarter, during which the company could for the first time generate $1 billion in revenue, they added.
Some people who currently subscribe to combined DVD-and-streaming plans that cost $10 or more per month have been switching to the $8 per month streaming-only plan or the newly instituted $8 per month DVD-only plan rather than pay an additional $6 or more per month under the new pricing structure.
The price increase sparked an outcry online, including more than 80,000 overwhelmingly negative comments on Netflix's Facebook page. However, Hastings said he was not disturbed. "Believe it or not, the noise level was less than we expected given a 60% price increase for some subscribers."
The company predicted that it would end the current quarter with between 24.6 million and 25.4 million subscribers in the U.S., which could mean no increase from its June 30 total of 24.6 million. Netflix expects that about 10 million people will choose the streaming-only plan, 3 million will choose the DVD-only plan and 12 million will pay higher prices for both.
Revenue in the three months ended June 30 was $789 million, just slightly below the consensus estimate from analysts of $791.5 million.
However, the company's predicted results for the current quarter were a significant disappointment. Netflix said it would generate $799.5 million to $828.5 million in revenue, lower than the $846.5 million consensus. Earnings per share are expected to be 72 cents to $1.07; Wall Street had predicted $1.09.
The company did not comment on a soon-to-close agreement to stream movies from DreamWorks Animation that was confirmed Monday by a person familiar with the matter who was not authorized to speak publicly.
Netflix stock closed up $4.95, or 1.8%. at $281.53 before the release of its financial results. The stock fell $28.73, or 10.2%, to $252.80 in after-hours trading.
Times staff writer Joe Flint contributed to this report.