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Netflix Earnings: Investors worry about Netflix subscriber growth

The video rental service returns to profitability but sees a drop-off in profits and cautions that it may not meet its full-year target for 7 million new domestic subscribers.

Now we know why Netflix CEO Reed Hastings may have recently played up the number of viewing hours customers were devoting to his service.

Netflix CEO Reed Hastings is going to have to explain why the growth in streaming is not keeping pace with the decline in the DVD business. James Martin/CNET

Netflix said today that it may not meet its goal of adding 7 million new subscribers in the United States this year. The Web's top video rental service added 530,000 domestic streaming subscriptions in the quarter but reported a decline of 850,000 U.S. subscriptions to its DVD service.

While that means the total number of Netflix's net U.S. subscriptions shrunk by 320,000, the company still managed to increase the number of U.S. subscribers by 420,000. Netflix said that interest in Olympics Games in London this summer could reduce the amount of viewing and new sign ups.

The difference between subscriptions and subscribers is that "unique subscribers" counts people and not the types of accounts. So, for example, if people dropped their DVD subscription they might have remained as a streaming customer and weren't counted among the "net new subscription additions."

For Netflix's International business, the company added nearly 600,000 new subscriptions.

Hastings had warned that the DVD business would continue to decline as customers moved over to streaming. But what's surprising is that Netflix isn't adding streaming subscriptions as fast as its losing DVD accounts.

Netflix is trying to recover from a disastrous period a year ago when the company raised prices and eventually tried to spin off DVD operations. Both moves were much criticized by customers. The price hike stuck but Hastings abandoned the attempt to split up the company. What it looks like now is that Netflix has a ways to go before putting the period behind it. (Read an in-depth and exclusive CNET story about Netflix's missteps of last year here).

As for the company's financial performance, Netflix reported a profit of $6 million, or 11 cents per share, for the second quarter on revenue of $889 million.

The numbers were on the high side of the company's guidance but they were still way off last year's performance. The slim profit marked a 91 percent decrease from last year, when Netflix reported earnings of $68 million, or $1.26 cents per share.

The fall-off in profits and the questions about subscriber growth may be part of why the company's share price plunged 14 percent in after-hours trading.

Netflix's stock fell $11 to $69.13.

Correction This story incorrectly reported that Netflix's U.S. subscribers fell in the second quarter. The company saw an increase of 420,000 subscribers in the United States. The headline has been changed to reflect the correction.
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