NEW YORK (TheStreet) -- Is Netflix (NFLX) deluded or just confident? That's the question investors are asking today after the movie rental company issued a cautious statement regarding its subscription price hike but then went on to release an optimistic fourth-quarter outlook.
Netflix addressed the uproar over its hike in subscription rates, saying it does expect to see some cancellations in the third quarter. But apparently, it takes only one quarter to sort it all out, and Netflix not only foresees a return to subscription growth in the fourth quarter, but also expects to hit the $1 billion revenue mark.
"Because of the timing [of the price increase], we announced it at the very beginning of the quarter, we will see the negative effects of it in Q3.That is the elevated churn and lower revenue growth that we would otherwise have."Then the price increase takes effect essentially mid-September on average. So we get a little bit of benefit at the end of the quarter, and then the real benefit comes in the following quarters, Q4 and beyond. But in terms of tracking where we are and our expectations, we're feeling very good," Chief Executive Reed Hastings said on a call with Wall Street. >Click here to take our Netflix poll. "In Q4, we expect domestic net additions to return to a pattern of year-over-year growth while revenue will reflect a full quarter's impact of the pricing changes, which could result in Q4 being our first billion-dollar global revenue quarter, driven by strong U.S. performance," Hasting said. This confidence, Hastings says, is due to Netflix's success with its streaming-only plan. The company has said about 75% of its new subscribers chose the streaming-only plan, even though the DVD plus streaming plan is only $2 more. "With this price change, we're going to be able to strengthen that streaming plan with more content. So that's why we feel good about it," Hastings said. But analysts say Hastings' logic is a bit flawed. "We believe this analysis ignores the opportunity cost associated with winning new subscribers; we believe current subscribers are less likely to promote or recommend Netflix after the price increase," Janney Capital Markets analyst Tony Wible wrote in a note.
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