By Shalini Ramachandran and Maria Armental
Netflix Inc. on Monday reported its weakest subscriber expansion
in two years, as the streaming video company saw a sharp slowdown
in new additions in the U.S. and abroad.
Shares of Netflix, down 14% this year, fell 15% to $83.90 in
after-hours trading.
However, the Los Gatos, Calif.-based company also reported
earnings that handily beat analysts' earnings estimates and its
prior guidance, thanks in part to lower content costs.
Netflix added 1.68 million streaming subscribers in the June
quarter, missing its projection of 2.5 million, and ended the
quarter with 83.18 million subscribers, including 79.9 million paid
subscriptions.
During the second quarter, Netflix added 160,000 subscribers in
the U.S. and 1.52 million abroad, below expectations of 500,000 in
the U.S. and 2 million abroad. The company's domestic subscriber
growth has slowed year-over-year over the past four consecutive
quarters.
The company had warned it would feel the effects of earlier
price increases, particularly in the U.S., where it had said more
than half of its customers had been "grandfathered" under the lower
prices. Netflix is phasing out the lower prices for those customers
this year, which it has said may result in "modestly increased
churn."
On Monday, Netflix said cancellations, or churn in the
industry's lingo, ticked up in the quarter, coinciding with news
coverage in early April of its plans to bring up to full price
those subscribers who had been locked-in at the lower prices. The
company said it believed that subscribers may have erroneously
thought the company planned another price increase. Over all,
however, within those customers who had been locked-in the lower
prices, the churn rate "is modest and conforms with our
expectations."
"While un-SHYgrandfathering and associated media coverage may
moderate near-SHYterm membership growth, we believe that
un-SHYgrandfathering will provide us with more revenue to invest in
our content to satisfy members, thus driving long-SHYterm growth,"
the company wrote in its letter to shareholders.
The company said it isn't revising its stated U.S. subscriber
goals following the rocky quarter because it believes price
increases -- as opposed to market maturity -- were the cause for
the higher number of subscriber cancellations.
"We don't believe market saturation is a key factor in the U.S.
given that we experienced similar performance over the same period
in multiple countries with differing levels of Netflix market
penetration."
The latest quarter was the weakest number of total new additions
since Netflix added 1.69 million users in the June 2014 quarter. In
comparison, Netflix added 6.74 million new users in the March
quarter and 3.28 million in the year-ago June quarter.
Netflix cautioned not to make too much of its misses in its
early days as a global player. It noted that in some of its first
territories outside the U.S., adoption rate in the first several
months has been "highly varied and initial uptake is not
necessarily indicative of our long-term penetration."
The company, though, acknowledged that it is trying some new
strategies to encourage customers to sign up, including by allowing
shows like "Club de Cuervos," "Narcos" and "Marseille" to air on
broadcast TV ahead of the next season's premiere on Netflix.
"The danger," Netflix acknowledged, "is diluting the perception
that Netflix original content is only on Netflix, so we are testing
cautiously."
For the current quarter, Netflix projects 2.3 million additional
streaming subscribers, compared with analysts' projection of 3.5
million additions, according to FactSet.
The streaming giant, which is facing increasing competition from
the likes of Amazon.com Inc., has said it hopes to complete its
global rollout by the end of the year, although it has acknowledged
it has encountered challenges to get into China. In a letter to
shareholders, the company said it is still exploring an entry into
the country, but that "the regulatory climate in China for our
service has become more challenging."
At the same time, Netflix is pouring more money into original
shows and movies, as well as marketing. Its streaming content
obligations ballooned to $13.2 billion at the quarter's end, from
$10.1 billion a year ago.
Also on Monday, Netflix announced a deal to premiere CBS Corp.'s
new "Star Trek" original series in 188 countries, excluding the
U.S. and Canada. The series, which is being created for CBS'
streaming service CBS All Access, marks the first time Netflix has
acquired the international rights for an original show made by a
rival streaming service.
Over all, Netflix reported second-quarter profit of $40.8
million, or 9 cents a share, compared with $26.3 million, or 6
cents a share, a year earlier. Excluding certain items, profit fell
to 7 cents a share from 10 cents a share a year earlier.
Revenue jumped 28% to $2.11 billion.
Analysts surveyed by Thomson Reuters had projected a profit of 2
cents a share on $2.11 billion in revenue.
For the current third quarter, Netflix projected earnings of 5
cents a share, below the Thomson Reuters estimate of 7 cents a
share.
In a bright spot, Netflix said the markets that it launched
before 2014 -- which include Latin America, Canada, the Nordics,
U.K. and Ireland -- are on track to deliver a contribution profit
of around $500 million this year and are each individually
profitable. Netflix hasn't previously disclosed the health of those
individual markets.
The company said it expects to run at "break even" this year and
"generate material profits in 2017 and beyond" by reducing
international losses and continuing to grow in the U.S.
Netflix Chief Executive Reed Hastings has said that it would be
easier for Netflix to reach its stated goal of 60 million to 90
million customers in the mature U.S. market if more cable providers
would join forces to offer Netflix through their set-top boxes.
Earlier this month, Netflix and Comcast Corp., the nation's largest
cable provider, finally announced such a deal after years of
feuding.
Netflix said in the shareholder letter that it isn't sure about
the timing of that integration because "we and Comcast will only
release Netflix on the X1 when the viewer experience is great."
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com
and Maria Armental at maria.armental@wsj.com
(END) Dow Jones Newswires
July 18, 2016 17:14 ET (21:14 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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