Netflix is Short on Subscriber Growth But Beats Earnings Estimates

Sun Valley Reed Hastings - H 2014

Sun Valley Reed Hastings - H 2014

Shares of the streaming-media service tumbled bad in after-hours trading

Netflix stock was tumbling 23 percent -- more than $100 a share -- after the closing bell on Wednesday after the company announced quarterly subscriber numbers that were far short of expectations, even though the company beat earnings estimates.

The company was expected to add 1.37 million domestic net streaming customers in the quarter, though it added only 980,000.

Netflix earned 96 cents per share in the third quarter, more than the 92 cents that analysts had predicted. Revenue was $1.41 billion, about what analysts expected, the streaming-media company said Wednesday. In the same quarter a year ago, the company earned 52 cents a share on $1.1 billion in revenue.

Netflix said it added 3.02 million subscribers worldwide during the quarter, though analysts expected 3.69 million. It ended the quarter with 53.06 million subscribers worldwide, up from 50.05 million in the second quarter.

Netflix's earnings report comes the same day as the announcement earlier of a new competitor: HBO said it will launch an over-the-top service in the U.S. That news quickly sent shares of Netflix 4 percent lower on Wednesday, though the stock rallied at the end of the session to close about even as investors presumed a good earnings report would come after the closing bell. The mini-rally was very short-lived, though, as the stock cratered the moment the earnings announcement was released.

HBO boss Richard Plepler didn't go into details about the premium channel's planned standalone streaming service, except that he expects it to launch in 2015. He made the announcement at parent company Time Warner's investor day in New York on Wednesday.

In a letter to shareholders on Wednesday, Netflix CEO Reed Hastings addressed the HBO announcement.

"Starting back in 2011 we started saying that HBO would be our primary long-term competitor, particularly for content," Hastings wrote. "The competition will drive us both to be better. It was inevitable and sensible that they would eventually offer their service as a standalone application. Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV." 

With 36.3 million subscribers in the U.S., Netflix is the nation's biggest standalone subscription TV and movie service. HBO has about 30 million U.S. subscribers.

In his letter to shareholders, Hastings also said that a price hike of $1 a month for new users was to blame for subscriber growth not only missing the expectations of analysts but also Netflix's own guidance.

"For the prior three quarters, we under-forecasted membership growth. This quarter we over-forecasted membership growth," he wrote. "We'll continue to give you our internal forecast for the current quarter, and it will be high some of the time and low other times."

Hastings insinuated in his letter that the subscriber growth might have been even worse if not for "the large positive reception to season two of Orange is the New Black."

For the fourth quarter, the company said it will earn about 44 cents per share, far below the 85 cents analysts were expecting, and another reason the stock was tanking during the after-hours session. Netflix said it will add about 4 million streaming subscribers worldwide in the fourth quarter, which is about 70,000 fewer additions than in the same quarter a year ago. Hastings said the price increase was factored into the guidance.

In a webcast after the company released its earnings, Hastings and chief content officer Ted Sarandos addressed their controversial plan for original movies. The company said two weeks ago it will make four movies with Adam Sandler, and Hastings on Wednesday likened them to episodic TV-style programming "but now in movie form."

A few days prior to the Sandler announcement, Netflix said it was teaming with The Weinstein Co. for Crouching Tiger, Hidden Dragon: The Green Legend. The plan is for it to debut on Netflix the same day it opens on Imax screens, though exhibitors like AMC Theatres, Regal and Cinemark said they won't show the movie on their Imax screens.

Sarandos said on the webcast Wednesday that the decision from the exhibitors will have "very little" economic impact on Netflix. "The real story will unfold Aug. 28," he said. "We'll see if it's on those screens or not."