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Netflix price hike boosts 3Q profit but earnings outlook dives

Remember that Netflix price increase? A lot of potential subscribers did, resulting in fewer-than-expected sign-ups. That, and an austere outlook for earnings, has investors spooked.

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Netflix expanded into six European countries in the third quarter. Joan E. Solsman/CNET

Netflix's profit jumped 86 percent in the third quarter, but the streaming-video company's higher prices kept too many new subscribers at bay, and its dire earnings outlook has investors fleeing.

Netflix predicted 44 cents per share in earnings in the current, fourth quarter. On average, Wall Street analysts who track Netflix expected fourth-quarter earnings of 85 cents a share.

Shares slumped 26 percent to $331.73 after hours on Wednesday. The stock had risen about 24 percent so far this year, hitting an all-time high last month just ahead of its move into six mainland European countries.

Netflix is in the midst of a transformation into an online television network, and the world's biggest one at that. But the costs of its ambitions -- including high-cost original series and its biggest geographic expansion ever last month -- propelled the company to raise prices earlier this year for any new members. It was a move Netflix resisted for three years, after it lost thousands of outraged subscribers when it spiked prices as part of a failed attempt to split its DVD rental and on-demand services.

In a letter to investors Wednesday, Netflix CEO Reed Hastings said the primary cause of the weak sign-ups in the US was the slightly higher prices new members now face. He stressed that per-member viewing and retention in the US didn't change significantly, and so the company doubts that competition from piracy or rivals like Hulu and Amazon Prime were the cause.

Netflix added 980,000 new domestic streaming customers in the second quarter, for a total of 37.2 million, lower than it predicted in July. Its international subscriber base expanded by 2 million members to 15.8 million, also lower than predicted. Looking ahead, it projected it would add add 1.9 domestic members and 2.2 international ones in the current quarter.

"This quarter we over-forecasted membership growth," Hastings said in the letter about the results. "We'll continue to give you our internal forecast for the current quarter, and it will be high some of the time and low other times."

International growth is one of Netflix's top priorities, and its rapid adoption abroad has made its business there an influential factor in how the company as a whole is performing, though the US remains its No. 1 market.

In mid-September, Netflix launched in Germany, France, Austria, Switzerland, Belgium and Luxembourg. The push came late in the quarter, but Netflix's performance there is under a microscope: The combined markets nearly rival the US in potential subscribers and are more abundant with high-speed broadband users than any other territories Netflix has ever touched. It makes the expansion an essential tactic for Netflix to keep its growth rate high in the coming years as its services pervade in the US and, thus, are more difficult to grow rapidly at home.

Overall, Netflix reported a profit of $59.3 million, or 96 cents a share, compared with $31.8 million, or 52 cents a share, a year earlier. Revenue increased 27 percent to $1.41 billion. Analysts on average expected per-share profit of 93 cents a share and $1.41 billion in revenue.

Netflix will hold a live video discussion of the results, including comments from its chief and other executives. It will start streaming on Netflix's investor relations' website at 3 p.m. PT.

Update, 1:55 p.m. PT: Adds further details and context.