SAN FRANCISCO - Netflix Inc. got off to a rousing start during the first three months of the year, but investors are worried about the online DVD rental service's script for the rest of 2008.
After benefiting from the biggest quarterly influx of new customers in its 10-year history, Netflix is preparing for slowing growth during the next few months and bracing for higher expenses to pay for the shift to high-definition DVDs and increased digital downloading of movies and TV shows.
Those factors contributed to a cautious outlook that caused Netflix's recently rising stock price to plunge 14 percent in after-hours trading Monday after the Los Gatos-based company released its first-quarter results.
Many investors also seemed disappointed that Netflix's first-quarter profit increase of 36 percent merely matched analyst projections instead of exceeding expectations.
A small percentage of Netflix's customers also could be feeling disillusioned later this year when the service said it plans to impose a "modest" fee increase to rent more expensive, high-definition Blu-ray discs. The company is raising rates to help offset rising costs as it expands its library to include more selections in the high-definition format.
Netflix's most popular rental plans currently range from $13.99 to $16.99 per month.
The rate increases are expected to affect less than 10 percent of Netflix subscribers because relatively few households own Blu-ray DVD players.
But it wasn't all bad news for customers.
Netflix also disclosed that it has lined up three more partners to expand a service that will let subscribers stream about 9,000 movies and TV shows over high-speed Internet connections at no additional cost. Paying for the streaming service is driving up Netflix's expenses, though management hasn't quantified by how much.
Three consumer electronics companies will stream Netflix's digital service on televisions, expanding upon an earlier partnership announced earlier this year LG Electronics.
Chief Executive Reed Hastings didn't identify Netflix's newest partners but said two of them are well known. The box for delivering Netflix's streaming service to television is expected to hit the market during the fourth quarter.
In the first quarter, Netflix earned $13.4 million, or 21 cents per share, up from net income of $9.9 million, or 14 cents per share, in the same 2007 period.
Revenue rose 7 percent to $326.2 million from $305.3 million.
Netflix ended March with 8.24 million subscribers, a gain of 764,000 customers from the end of 2007. That eclipsed the service's previous record of 687,000 new customers added in the first quarter of 2006.
Management attributed much of the first-quarter surge to a series of rate increases announced in late December by its biggest rival, Blockbuster Inc. The higher prices triggered a backlash that drove more DVD renters to Netflix, which cut its prices last summer.
But Netflix anticipates only 60,000 to 260,000 more customers will sign up during the current quarter ending in June - typically a challenging period anyway because more people are interested in basking in the warm weather than in watching movies on their couches.
In another worrisome sign, Netflix shaved a penny off the upper end of its full-year guidance to $1.29 per share.
Netflix shares plunged $5.52 to $33.80 in Monday's extended trading. The Los Gatos-based company's market value had risen nearly 50 percent this year on hopes it would be able to build momentum.
Propelled by more robust growth toward the end of the year, Netflix anticipates entering 2009 with as many as 9.7 million subscribers, up from its previous forecast of 9.5 million customers.
