Netflix Adds Far Fewer Subscribers During Second Quarter

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Netflix CEO Reed Hastings

The streaming-media company missed its own guidance for subscriber numbers, despite beating earnings expectations, which sent its stock down sharply in after-hours trading.

Netflix added a fewer-than-expected 1.7 million subscribers during its latest financial quarter, as the streaming giant continues its international expansion, below a company forecast of 2.5 million subscribers and the 3.28 million customers added during the second quarter last year.

That sent its stock down sharply by $14.60, or 15 percent, to $83.80 in after-hours trading on Monday.

"We are growing, but not as fast as we would like or have been," the streaming giant said in a statement as it released its second quarter results late Monday, before adding: "Disrupting a big market can be bumpy."

Netflix CEO Reed Hastings in a conference call with analysts apologized for the "volatility," but insisted the streaming giant was on course for future growth. Netflix said it added 160,000 subscribers in the U.S. market, down from guidance of 500,000 subscribers. And the streamer added 1.5 million subscribers abroad, well down from a 2 million forecast.

Hastings put the dramatically slower subscriber growth down to churn, or existing customers quitting over higher prices imposed by Netflix. He added the weak subscriber growth would be short-lived as the "ungrandfathering" would be over by the end of fiscal 2016. 

"People don't like price increases. We know that. It's a necessary phase to get through," Hastings told analysts. Netflix also saw fewer customer sign-ups during the latest quarter as it faces increased competition for viewers from the upcoming Summer Olympics, another one-time event.

Netflix, which currently has more than 83 million subscribers, is counting on the price increase to help offset its increased spending on original and exclusive programming. The price hikes have boosted the bottom line, however.

Netflix posted second-quarter earnings of $41 million, or 9 cents per share, on overall revenues at $1.96 billion. That beat an analyst forecast of 3 cents per share for the quarter. The company said the profit rise was also due to lower content costs than forecast.

Even so, slowing subscriber growth captured the bulk of attention from investors. The streaming giant said it faced growing competition on the SVOD front from new offerings like CBS All Access, Seeso, Amazon Prime Video, Hulu and YouTube Red.

"Our view, however, is that we are all growing primarily against linear TV hours and that competition did not contribute materially to our miss in Q2," the company said in a statement that accompanied its financial results. "Similarly, 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," Netflix added.

The streamer is looking to the international market for growth. "While we did not grow as fast as forecast in Q2, we are optimistic about the future owing to our singular focus, global scale and the growth of Internet TV viewing," the company said in its commentary.

 

Netflix introduced its TV service to 130 new markets in January, expanding internationally, except China. The streamer in its commentary said the regulatory climate in China "has become more challenging," so don't expect any quick entry into that fast-growing market.

 

Netflix noted Disney's streaming service in China, launched with Alibaba, was shut down, as was Apple's movie offering. "We continue to explore options and, in the meantime, have plenty of work to do in our newly opened markets,"  the company said.

Netflix projected it will add 2 million customers abroad in the third quarter, with the international loss during Q3 expected to be $95 million "as improving profitability in our earlier foreign markets funds the investment in newer international territories."

July 18, 6 p.m. Updated with comments by CEO Reed Hastings on slower subscriber growth offered during an analyst call.

 

 

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