Video rental company Netflix Inc projected slower subscriber growth this quarter for its key U.S. video-streaming service, disappointing investors and sending its shares down 17 percent after hours.

While Netflix reported a first-quarter loss that was not as steep as Wall Street projected, it warned that domestic second-quarter streaming additions would fall below the level during the same period in 2010.

The stock plunged 17 percent to $84.85 in after-hours trading, down from a close at $101.84 on Nasdaq.

Despite predicting total U.S. streaming-subscriber additions in 2012 would reach about 7 million, about the same as in 2010, the nearer-term guidance rattled investors, said Wedbush Securities analyst Michael Pachter.

Adding customers to the instant-streaming business is crucial to the company's future as it moves away from mailing DVDs in its signature red envelopes. And sustaining strong growth in users will help offset rising costs as Netflix writes bigger checks for new movies and TV shows.

They are giving a signal to the Street their growth story is over, said Pachter, who rates Netflix a sell.

Netflix said seasonal variations would affect second-quarter customer growth. In a letter to shareholders, CEO Reed Hastings and CFO David Wells said they saw nothing new or particularly concerning about customer viewing, acquisition and retention. All are healthy, they said.

Our gross additions are strong. Our retention is strong. We are feeling good about the year, Hastings said in an interview with Reuters.

LOST CREDIBILITY

Netflix never fully recovered credibility with investors after a tumultuous 2011, when a price-hike and plan to hive off its DVD business -- quickly abandoned -- sparked cancellations by angry customers.

It lost more than 800,000 U.S. subscribers in the third quarter, though it rebounded by gaining back 610,000 in the last three months of the year.

Once one of Wall Street's highest-flying stocks, its shares dropped from $304.79 in July to $62.37 in November.

The brand recovery is partway complete and will take about three years with most of it happening the first year, Hastings said during a conference call with analysts.

For the first quarter, Netflix posted revenue of $870 million, up 21 percent from a year earlier. The company had a net loss of $4.6 million or 8 cents per share in the quarter, versus a net profit of $60.2 million a year earlier.

Analysts had expected a loss of 27 cents per share, according to Thomson Reuters I/B/E/S.

The company added 1.7 million U.S. streaming customers in the quarter for a total of 23.4 million. DVD subscribers fell by about 1.1 million to 10.1 million.

Some analysts have speculated Hastings will try to sell the DVD business. On the conference call, he said he was not considering the idea.

While it transitions to streaming and expands around the world, Netflix faces growing competition from rivals such as Amazon.com Inc and Comcast Corp's Streampix.

The company attributed its quarterly loss to start-up costs abroad. Netflix added 1.2 million customers in international markets during the second quarter, for a total of 3.1 million.

The company said it expected to return to profitability in the second quarter and launch in another European market in the fourth quarter of this year.

The move into another market may have added to concerns among investors, said Gabelli & Co analyst Brett Harriss.

It's very aggressive. I think investors are gun-shy from their last aggressive move into foreign markets, said Harriss, who has a hold rating on Netflix.

(Editing by Phil Berlowitz and Muralikumar Anantharaman)

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