By Shalini Ramachandran and Maria Armental
Netflix Inc. on Monday reported its weakest subscriber expansion
in three years, as the streaming-video company suffered a sharp
slowdown in net customer additions in the U.S. and abroad.
Shares of Netflix, down 14% this year, fell 13% in after-hours
trading.
During the second quarter, Netflix added 160,000 subscribers in
the U.S. and 1.52 million in international markets, below
expectations of 500,000 in the U.S. and 2 million abroad. It ended
the quarter with 83.18 million subscribers.
The Los Gatos, Calif.-based company said price increases for
existing subscribers led to higher service cancellations and
contributed to its weaker-than-expected results. In the U.S., more
than half its customers had been "grandfathered" under lower prices
but will be phased into higher rates this year.
"Whatever the price is for something, people don't like it to go
up," Chief Executive Reed Hastings said on a videoconference call
with analysts. "We apologize for the volatility; I know it's not
easy on everyone," he said. "The big picture is very much
intact."
Drexel Hamilton analyst Tony Wible said investors are missing
the bigger picture, because the higher revenue from the price
increase more than outweighs the negative of losing some
subscribers. Netflix's revenue in the quarter jumped 28% to $2.11
billion.
Mr. Wible said that the hit to Netflix's stock is a buying
opportunity "at a time when most media is facing unsustainable
financial pressures."
For the third quarter, Netflix projected a modest increase of
300,000 U.S. customers, due to the phasing in of the price
increases and Olympics coverage that could potentially discourage
new subscriber sign-ups.
Despite the disappointing subscriber results, Netflix reported
earnings growth that handily beat analysts' earnings estimates and
its prior guidance, thanks in part to lower content costs.
In a letter to shareholders, Netflix said it wasn't revising its
stated U.S. subscriber goals to sign up 60 million to 90 million
customers in the long term.
Netflix's addition of 1.68 million streaming subscribers in the
latest quarter was the weakest tally since Netflix added 1.24
million users in the June 2013 quarter.
The streaming giant, which is facing increasing competition from
Amazon.com Inc. and Hulu along with a range of other web TV
services, has said it hopes to complete its global expansion this
year. The company said in the letter to shareholders it is still
exploring an entry into China, but that "the regulatory climate in
China for our service has become more challenging."
Netflix continues to open its wallet for programming. It
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.
Netflix has started allowing original shows, such as "Club de
Cuervos," "Narcos" and "Marseille," to air on broadcast TV before
the next season's premiere on Netflix. "The danger," Netflix
acknowledged in the letter, "is diluting the perception that
Netflix original content is only on Netflix, so we are testing
cautiously."
Mr. Hastings said Netflix is studying adding the ability to let
users download shows to watch them later, a feature that could help
in markets where cellular networks aren't as strong as in the
U.S.
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.
Analysts surveyed by Thomson Reuters had projected a profit of 2
cents a share on $2.11 billion in revenue.
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.
Write to Shalini Ramachandran at shalini.ramachandran@wsj.com
and Maria Armental at maria.armental@wsj.com
(END) Dow Jones Newswires
July 19, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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