Netflix shares have been taking a beating this morning after returning some pretty positive earnings news. On Monday, Netflix reported a first-quarter profit that rose 35% as subscribers increased by 21%. Revenue rose to $326.2 million from $305.3 million, an increase of 7%.

Several analysts believe that Netflix (NFLX) shares already reflect potential upside from a growing subscriber base and reduced competition from arch-rival Blockbuster.

"These benefits should manifest in the form of lower levels of [subscriber acquisition costs] and churn at Netflix," wrote Credit Suisse analyst Heath Terry, who downgraded the stock to neutral Tuesday morning following the results. "However, in our opinion, with the stock up 70% since December, we believe shares of Netflix reflect these improved trends and a more realistic view of the company's long-term prospects."

Unfortunately for the investors, Netflix lowered its earnings forecast for the year, citing an expected rise in expenses. They now expect to earn $1.16 to $1.29 a share for 2008, compared with its previous forecast of $1.18 to $1.30 a share.

Expenses related to the company's effort to make movie rentals available for download from the Internet accounted for the difference, Chief Financial Officer Barry McCarthy told analysts during a conference call.

McCarthy indicated the company spent more than some analysts had anticipated in the first quarter to "deliver movies over the Internet to different devices."

The increased spending has put pressure on the company's gross margins. Andy Hargreaves of Pacific Crest pointed out that the company would have missed its earnings target for the quarter had it not been for the sale of a short-term investment.

"Instant watch is likely to gain further traction over the next two years. Consequently, we expect spending to support the feature to continue to increase," Hargreaves wrote in a report. "Unless Netflix offsets this spending with revenue, it will continue to act as a drag on profitability."

For the second quarter, Netflix expects to have 8.3 million to 8.5 million subscribers. It sees net income of 33 cents to 42 cents a share on revenue of $334 million to $339 million.
The company raised its full-year forecasts for revenue and subscribers. It now expects to end the year with 9.1 million to 9.7 million subscribers, up from its previous estimate of 8.9 million to 9.5 million.

Doesn't look like there is any good news here. The stock has had a huge run-up over the year and is correcting itself.