Netflix Misses on Subscriber Growth During Quiet First Quarter

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Netflix CEO Reed Hastings

The streamer added 5 million new members during the first quarter, just shy of its previous estimates, as it moved premieres of popular shows including 'House of Cards' to the second quarter.

Netflix added just under 5 million new subscribers during the first quarter, but came short of reaching the 100 million member milestone that investors were hoping for, sending its stock down during afterhours trading on Monday. 

The streaming giant disclosed its quarterly earnings on Monday, revealing earnings of 40 cents per share on revenue of $2.64 billion, up nearly 35 percent from the same period last year. Wall Street was expecting earnings of 38 cents per share on $2.64 billion in revenue. 

Last earnings report, Netflix estimated that it would add 5.2 million subscribers worldwide during the first three months of the year. It fell just short of that number, adding 1.42 million subscribers in the U.S. and 3.53 million abroad.

The company attributed the lower subscription additions to a quarter in which it debuted fewer hit shows, including the season five premiere of House of Cards, which moved from the first quarter in previous years to the second quarter this year. Meanwhile, breakout 13 Reasons Why premiered on the last day of the period.

Later, on a pre-recorded Q&A with Wall Street analysts, Netflix executives continued the common refrain that investors should not read much into a single quarter's results. CEO Reed Hastings added that the company will reach 100 million subscribers this weekend. 

Netflix's growth, especially abroad, largely has been the result of its international push last year, when it launched simultaneously in more than 130 countries. Since then, the company has prioritized local productions in large potential markets including Brazil and several countries in Europe. One example of this strategy is Ultimate Beastmaster, a competition series with localized episodes in the U.S., Japan, South Korea, Brazil, Mexico and Germany.

But investors have been weary of Netflix's sky-high growth and continue to search for signs that the company will start to see fewer subscriber gains every month as it runs out of new countries to enter. 

The company continues to invest heavily into content production and recently re-upped with Adam Sandler in a deal that will see the comedian make four more films for Netflix. In its quarterly shareholder letter, the company said that its members have spent more than a half a billion hours watching Sandler's films on the streamer. 

As its content spending has increased, so has the cost to promote these projects. Netflix said Monday that it will spend over $1 billion in 2017 to market its content.

While the company is starting to see competition from other streaming services, including Amazon, and live TV services like DirecTV Now and YouTube TV, it maintains that the competition won't have an impact on its business. Regarding Amazon's deal to stream live NFL games, the shareholder letter reads, "This is not a strategy that we think is smart for us since we believe we can earn more viewing and satisfaction from spending that money on movies and TV shows."

The company, which has begun buying up movies and releasing them exclusively for its members, also took a subtle jab at Amazon and the e-commerce giant's decision to release its original films in theaters before bringing them to Prime subscribers by saying, "Since our members are funding these films, they should be the first to see them."

Elaborating on the call, Hastings spoke fondly of Amazon CEO Jeff Bezos, but said he does not think the company will affect Netflix's business. Instead, he noted that people often stay up late binge watching Netflix shows: "We're competing with sleep."

One competitor that Hastings does seem worried about is YouTube. He mentioned the Google-owned, ad-supported streamer multiple times during the call. "We've definitely got YouTube envy," he said, noting that the streamer has 1 billion views a day, while Netflix sees a little over 1 billion a week. "We've got a long way to catch up to YouTube."   

In a rare admission of failure, Netflix noted in the shareholder letter that financing Crouching Tiger, Hidden Dragon: Sword of Destiny was not a better deal than licensing the title. Producer Scott Stuber, the letter continued, has been hired to manage such decisions as he leads Netflix's original film efforts.

Netflix stock closed the day up 3 percent to $147.25. It is trading down more than 3 percent afterhours. 

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