Netflix, Inc. (NFLX) Earnings Confirms Subscriber Loss Fears

Netflix Earnings Confirms Subscriber Loss Fears
Netflix, shares plummeted more than 13% during after-hours trading as the company disappointed investors with its slow subscriber growth

On Monday, US streaming giant Netflix, Inc. (NASDAQ:NFLX) stock flopped over 13% to $85.90 as the company revealed its weaker-than-expected subscriber growth numbers for the second quarter earnings of fiscal year 2016. In past three years, this was the weakest subscriber expansion reported by the giant media company. This was because Netflix witnessed a sharp slowdown in its net subscriber additions in the domestic and international market.

According to the Los Gatos, California Company, it has just added 160,000 subscribers in the US as compared to its own guidance of half a million. In its international market, the company added 1.52 million customers, as opposed to the forecasted figure of two million, which brought its overall subscriber base to the total of 83 million. However, investors were waiting for a better number.

Netflix price hike was one of the main reasons for its stalled growth. In this last quarter, the streaming giant had implemented higher prices for its standard two-screen service, from $7.99 per month to $9.99 per month. Subscribers who had signed on with the company before May 2014 were exempted but only until October this year.

As per the company, its price hike for existing subscribers has led to higher cancellation of its service and has contributed to its slower-than-expected results. In its domestic market, more than half of its subscribers have been “grandfathered” under lower prices but will eventually be move into higher rates this year.

Netflix CEO Reed Hastings said that he is confident that the weakness in subscriber growth in the June quarter was not due to increased competition form its rivals such as Amazon’s Prime Video service. On the conference call with analysts, he stated that the subscriber miss was due to price hikes.

Netflix confirmed in the letter to shareholders that while the company is growing; it is “not as fast as we would like or have been.”

According to the CEO, this price hike is expected to help the company to boost its spending on content to $6 billion next year from $5 billion this year.

Mr. Hastings said in the note: "We are in the very early days of the shift from linear television to on¬-demand viewing and there are nearly 1 billion pay TV subscribers worldwide who will migrate to Internet TV over the coming decades,"

However, the streaming service provider said that the churn, a rate at which number of people is leaving the service, was just in line with what it was anticipating among those actually facing the increase. According to the company its gross additions, which it did not disclose, “remain healthy.”

Netflix Chief Executive Reed Hastings stated on a video conference call with analysts: “Whatever the price is for something, people don’t like it to go up, we apologize for the volatility; I know it’s not easy on everyone, the big picture is very much intact.”

Overall, the online video service provider reported second quarter earnings of $41 million or nine cents per share, surpassing analysts’ anticipation of three cents per share for the quarter. The company posted the revenues of $2.1 billion, reflecting a jump of 23% from $1.6 billion it had in the same quarter a year back.

Mr. Hastings said with the increased revenue: “we continue to invest in better and better content” and “that’s what makes us feel very strong and positive about the long-term and that it’s a short-term phenomenon.”

For the newly started third quarter, the giant streaming company anticipates a modest increase of 300,000 domestic subscribers, as compared to 880,000 it added in the same quarter a year back. According to the company, this is due to implementation of the price hike and Olympics coverage, which is likely to discourage new customer sign-ups.

Netflix Chief Financial Officer David Wells, speaking on the streaming giant’s 2Q earnings video call, warned that Olympics coverage world-wide in 3Q may discourage new subscriber signups in a “small” but “meaningful” way.

The company forecasts that its US contribution margin will improve on year-over-year (YoY) in both 3Q and 4Q and it predicts meeting its 40% US contribution margin projected by 2020, or even earlier.

During the reported quarter, Netflix introduced a new season of “Orange Is the New Black” and a second Adam Sandler film (“The Do Over”).

In the letter to its shareholders, the US streaming giant said that it was not revising its stated US customer target to sign up to 60 million to 90 million domestic subscribers in the long term, up from 46 million at the end of the second quarter.

Netflix, which is facing intense competition from Hulu, Amazon.com, and some other web TV services, has stated that it aims to complete its global expansion by the end of this year. The streaming giant stated in the letter that it is still exploring options to enter China, the most populous country in the world. However it is still facing uneven regulatory climate in the region, which is making its services more challenging.

The company revealed that it is still spending more toward exclusive programming. According to Netflix, its streaming content obligations have jumped to $13.2 billion at the end of the reported quarter from $10.1 billion a year back.

On the same day, Netflix announced that it has signed a landmark international licensing agreement with CBS Studios international for the latest television series, “Star Trek.” With this agreement, the US streaming giant will become the exclusive distributor of the series in more than 188 countries, excluding Canada and the US. This is because in these two regions CBS and Bell Media, respectively, have the exclusive rights to be the home of the series.

Each episode of this latest series will be available globally within the next 24 hours of its US premiere. Apart from this, all of the 727 episodes of the previous “Star Trek” TV series, including “Star Trek: The Original Series,” “Star Trek: The Next Generation,” “Star Trek: Deep Space Nine,” “Star Trek: Voyager” and “Star Trek: Enterprise,” will be there on the giant streaming service throughout the world by the end of this year.

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