Netflix Takes More Lumps

Updated from July 23

Netflix (NFLX) has said in the past that it prizes profitability over growth, but that was before Blockbuster (BBI) came out swinging on the Internet.

Coming off its first-ever quarterly decline in subscribers, the trendy Internet company that pioneered the online mail-order DVD subscription service says it will value growth over profitability until Blockbuster, the DVD rental chain that got caught flat-footed in the digital age, stops operating at a loss in order to steal market share with its fledgling online rental subscription service.

Netflix Chief Financial Officer Barry McCarthy said on a conference call following the company's second-quarter earnings release late Monday that the "pendulum swung too far" toward profitability in the second quarter, and the company will have to change its strategy to protect its market share.

As a result, the company lowered its profit and subscriber forecasts for 2007, and McCarthy predicted a decline in annual net income in 2008. That comes as a surprise on Wall Street, where analysts are currently expecting Netflix to earn 95 cents a share in 2008, up 25% from the 76 cents share they project for 2007.

Netflix CEO Reed Hastings said on the call that Wall Street's current forecasts for the company's profits are "excessively optimistic."

The weakened profit view sent shares tumbling $1.31, or 7.6%, to $15.96 Tuesday. That decline that comes on top of a 12% stock drop Monday, when news that the company was cutting prices on its service had investors concluding that the subscriber loss was in store.