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Netflix shares drop after it cuts subscriber forecast

By Lisa Richwine

LOS ANGELES (Reuters) - Netflix Inc added fewer U.S. customers than Wall Street expected in the third quarter, forcing the company to roll back its year-end subscriber forecast and sending shares plunging 15 percent.

Netflix said on Tuesday it added 1.2 million new U.S. customers to its on-demand TV and movie streaming service during the July to September period, for a total of 25.1 million. That fell at the low end of the company's guidance and below what some analysts predicted.

Shares of the company fell 15 percent to $58.04 in after-hours trading, down from an earlier $68.22 close on Nasdaq.

"Subscriber numbers were lower than expected, and the guidance for full year (customers) was lower than expected too," said Arvind Bhatia, an analyst at Sterne, Agee & Leach. "The streaming numbers don't look that great."

Netflix projected its U.S. membership base in the fourth quarter would reach as high as 27.1 million as it picks up new customers during the holiday season.

That would fall short of CEO Reed Hastings' forecast made six months ago that the company would add 7 million new U.S. streaming customers this year. To reach that goal, year-end subscribers would need to hit 28.7 million.

"We mis-predicted" the U.S. gains for the year, Hastings told analysts on a conference call. The company now is on track to end the year with 5 million additional U.S. streaming subscribers, he said.

"When something is as new and vibrant as Internet video, it is hard to predict the rates of growth," Hastings said in an interview. The company is "very happy" with the 5 million additions, a 20 percent gain from 2011, he said.

Quarterly profit beat Wall Street expectations. The company posted third-quarter earnings of 13 cents per share, or $8 million. Analysts on average had expected 4 cents per share, according to Thomson Reuters I/B/E/S. Revenue reached $905 million, Netflix said.

A year ago, Netflix reported $1.16 in earnings per share and revenue of $822 million.

For this year's third quarter, free cash flow dropped to negative $20 million. Because of spending on original programs such as "House of Cards" and "Hemlock Grove," as well as other content costs, "we anticipate negative (free cash flow) for several quarters," Hastings and CFO David Wells said in a letter to shareholders.

They said the company had enough cash on hand to fund its expenses and return to positive cash flow, but would re-examine spending plans for new programs next year.

Netflix previously warned it will lose money in the fourth quarter as it spends to add service in Scandinavia, part of a costly international expansion that is hitting its bottom line. On Tuesday, it forecast a $13 million loss to a $2 million profit for the last three months of the year.

In the third quarter, Netflix added 690,000 customers in foreign markets, bringing the total to 4.3 million.

Hastings outlined challenges in Latin America, where Netflix has more than 1 million members but is growing more slowly than it hoped. The company is trying to fix payment problems, such as barriers to credit and debit card transactions online, to help jump-start growth in the region, Hastings said.

"It will take longer than we had planned to get to profitability in Latin America, but we are confident that this will be a very large and profitable market for us in the long term," Hastings and Wells said in their letter.

In the Nordic region, Hastings said he was hopeful for success similar to Canada, where Netflix turned profitable within two years.

(Reporting By Lisa Richwine in Los Angeles; Additional reporting by Alistair Barr in San Francisco; Editing by Gary Hill, Bernard Orr and Ronald Grover)

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