In a market of inflated expectations, Netflix's record-setting first-quarter results weren't enough to hold off a significant drop for the stock on Wall Street in after-hours trading. Shares fell by up to 12% after the earnings report.
Netflix Inc. (Nasdaq: NFLX) added 6.74 million subscribers in the first quarter of the year, easily topping its previous record of 5.59 million new customers set in Q4 2015. Streaming revenue was also up to $1.81 billion from $1.67 billion in the fourth quarter.
However, the forecast for Q2 is less rosy, with Netflix projecting only 2.5 million new members. That would put the second quarter of 2016 roughly on a par with the second quarter of last year, but in addition to the seasonal drop, Netflix is also predicting lower streaming margins domestically. US streaming margins are expected to fall to 33.3% in Q2 from 35.5% in Q1, while international markets are still operating at a loss as Netflix builds out its global base.
Netflix cites massive spending on new content releases and associated marketing costs as the reasons behind lower margin expectations. However, it also says it expects to return to stronger margins in Q3, and the company believes it will still hit its target of 40% margins in the US by 2020.
Overall, Netflix streaming revenue is still expected to grow to $1.96 billion in the next three-month period.
Netflix executives pointed out several major milestones in reporting on the first quarter. After two years of streaming Ultra HD/4K content, Netflix now has ten times the number of 4K titles it had at launch. Netflix also began streaming its first show in High Dynamic Range (HDR) this week, and the company plans to expand its HDR library rapidly.
On the technology front, Netflix has improved its encoding process, with newly encoded content now either requiring 20% less bandwidth or being delivered at an equivalently higher level of quality. (See Netflix Isn't the Only One Rethinking ABR.)
In the second quarter, Netflix says it will start looking at bringing new encoding techniques to mobile video delivery, which should help with the customer experience particularly in emerging markets.
Throughout the live stream of the Netflix earnings call, executives focused heavily on the company's international performance. When asked about competition from other OTT providers offering live television streams, CEO Reed Hastings countered by suggesting that live TV, and particularly live American broadcasts are not at the heart of the Netflix brand.
"We're very focused on global competition," said Hastings, adding that Netflix isn't all that interested in carrying "single-nation networks."
Regarding live TV, Chief Content Officer Ted Sarandos also reiterated Netflix's position on the live sports market.
"There is no interest in live sports currently," stated Sarandos.
Commenting on a couple of touchy issues, Hastings responded to questions about Netflix throttling mobile content by saying that the company was just trying to save consumers from expensive data overage fees. (See Netflix Caps Its Own Streams.)
He also explained the company's plan for mobile delivery. Consumers will get the option of three different tiers of service, explained Hastings, "extreme data saving, moderate data saving or no data saving at all," depending on the video quality a viewer chooses.
Regarding the FCC's current Unlock the Box initiative, Hastings was largely dismissive, claiming that Netflix doesn't closely follow debates centered on US technology, but is instead focused on global platforms. (See 'Unlock the Box' Vote Is Just the Beginning.)
Asked point blank if the Unlock the Box proposal would be meaningful to Netflix if passed, the CEO was blunt. "I don't think so," said Hastings.
— Mari Silbey, Senior Editor, Cable/Video, Light Reading