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Netflix, Inc. Shares Plunge on Disappointing Subscriber Growth

Image source: Netflix.

Netflix (NASDAQ: NFLX) reported second-quarter results on the evening of Monday, July 19. Share prices fell as much as 15% in after-hours trading, erasing the gains Netflix recorded over the last three weeks.

Netflix's Q2 results: The raw numbers

 

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Total U.S. Streaming Members

47.1 milllion

42.3 million

11.3%

Total Int'l Streaming Members

36.1 million

23.3 million

54.9%

Revenue

$2.0 billion

$1.5 billion

32.7%

Net Income

$41 million

$26 million

57.7%

GAAP EPS

$0.09

$0.06

50%

Data source: Netflix. YOY = year over year.

What happened with Netflix this quarter?

Subscriber growth came in below expectations this time. On the other hand, low content costs led to surprisingly strong earnings. "Disrupting big markets can be bumpy," management explained.

  • Guidance figures pointed to about 0.5 million net new domestic subscribers this quarter. The actual tally stopped at 160,000. Gross additions were in line with management's forecasts, and churn increased as expected when grandfathered price increases started taking effect. But a large number of customers jumped ship a bit earlier, arguably scared away by April's press coverage of the upcoming price changes.
  • A similar pattern emerged in international markets, where Netflix un-grandfathered its price increases in a handful of territories this quarter. Final subscriber additions in this segment added up to 1.5 million, short of the 2.0 million target.
  • The company is not close to launching streaming services in China. Management is exploring its options in the world's largest consumer market, but other Western businesses have recently been forced out of the Middle Kingdom by draconian regulations.

Management offered detailed guidance for the third quarter, as follows:

  • Held back by the Rio Olympics, domestic streaming additions should stop at 300,000 net new subscribers. But as the end of grandfathered price boosts take effect, that 10% annual subscriber increase should lead to 23% higher domestic revenue.
  • International additions are seen landing at roughly 2 million new accounts. Here, the 46% year-over-year subscriber increase should result in 64% higher sales.

What management had to say

In the press materials, CEO Reed Hastings and CFO David Wells explained the disappointing subscriber additions thusly:

We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering. Churn of members who were actually un­grandfathered is modest and conforms to our expectations.

Note that the price increase appears to be cost-effective anyway. Revenue continued to grow quickly across the board, even as subscriber growth came in below expectations.

Looking ahead

Netflix is trying some new tactics to boost subscriber additions in coming quarters. Two episodes of original Netflix series Marseille have aired on French broadcast TV, and selected episodes of Spanish-language originals Narcos and Club de Cuervos will hit Univision and Unimas later on.

That's Netflix raising consumer awareness of its non-English content to key demographics, hoping viewers will feel the urge to follow up on the free taste with a paid, Netflix-powered binge. But the company is testing this approach carefully since management wants to protect the idea that its original content is exclusive to Netflix itself.

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Anders Bylund owns shares of Netflix. The Motley Fool both owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days.

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