It was a better-than-expected quarter for Netflix (NASDAQ:NFLX), but the year is toast. The DVD rent-by-mail pioneer produced a first-quarter loss of $0.17 a share on a 54% spike in revenue -- both amounts coming in ahead of Wall Street's targets -- during its first full reporting period since lowering its most popular plan's monthly price to $17.99. That result was expected. The quarter is typically a weak one, with a stronger marketing commitment than it devotes to the rest of the calendar year.
However, while the company once expected that it would break even for all of 2005, it is now guiding investors to expect a deficit for the current quarter as well as a loss of between $5 million and $15 million for the year as a whole. Revenue that it once projected to come in at $700 million or better for the year is also being reduced to a range of $660 million to $685 million.
That's where it gets hairy. Earlier this year, the company was able to get to 3 million subscribers fairly quickly, and churn held near its historic low at 5%. If the company is still looking to finish the year with roughly 4 million members, why so glum on the top and bottom line all of a sudden? Especially after the healthier than projected March quarter?
Connect the dots. If the subscribers are holding up -- and coming in earlier in the year than expected -- what could cause revenue to come in lower than originally anticipated? Yes, that's right, it smells like another price cut is possible. The company won't say it, and as a shareholder, I hope it's not true. (As a subscriber, well, obviously, I can live with that.) Perhaps it's the company's recent emphasis on the cheaper $11.99 plan, which caps rentals at four a month, that finds the top line skewing lower. If that's the case, I can live with that, too, because I like how that niche plan can produce reliable profitability. Active renters can overuse the more common $17.99 unlimited rental plan to the company's financial detriment.
Yet if that's so, it's not all that comforting to see the company's customer acquisition costs inch higher, especially for these lower-paying subscribers. While the company's guidance translates into profitability during the second half of the year, I know I won't be the only one watching its updated guidance in three months for clearer direction on the path back to positive earnings. I don't like to see rainbows stretched out further while I'm in the middle of a rainstorm.
Ever since the company dramatically cut its prices to dissuade Amazon.com (NASDAQ:AMZN) from entering the domestic DVD-rental market, and since Blockbuster (NYSE:BBI) followed suit with even more aggressive reductions on its plan, investors have wondered when there would be a cease-fire in this pricing war.
I will give Netflix the benefit of the doubt, but the market? It just isn't that kind.
Other related stories:
- Netflix also needs to think about tomorrow.
- There are ways for Blockbuster and Netflix to make this work.
- Talk shop with your fellow Fools in our Netflix discussion board.
Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and investor -- since 2002. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
