Stranger Things: Netflix Falls Short on Subs

Netflix isn't finding many friends on Wall Street this evening.

The world's largest video streaming provider reported late Wednesday that it fell far short of its subscriber targets for the second quarter, immediately plunging its stock price into a deep swoon. The company signed up 2.7 million new paying customers across the globe, more than 45% below its guidance of 5 million net adds.

Furthermore, Netflix actually suffered a loss of subscribers in its home US market, shedding 130,000 paying customers. That represents a stunning reversal from its gain of 870,000 subs in the year-ago period and came in well below the gain of 352,000 subs that had been forecast by FactSet. The company closed out June with 60.1 million US subs, still up from 56 million a year earlier.

Internationally, Netflix gained 2.83 million subscribers, boosting its total to 91.5 million. But that increase didn't come close to the 4.81 million sub gain that had been forecast by FactSet.

Going into today's highly anticipated earnings report, there had been much speculation about whether Netflix's recent price hikes, impending loss of two popular shows, The Office and Friends, and the prospect of new competitive services from AT&T WarnerMedia, NBCUniversal and the Walt Disney Co. might cast shadows over its financial performance. But Netflix executives shrugged off those concerns in their earnings report, instead blaming the disappointing results on a relative lack of strong content in the spring.

"We don't believe competition was a factor since there wasn't a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region)," the company said in its quarterly letter to shareholders. "Rather, we think Q2's content slate drove less growth in paid net adds than we anticipated."

In an interesting twist, Netflix officials also argued that their second-quarter results came in so low because their first-quarter results came in so high.

"Additionally, Q1 was so large for us (9.6m net adds), there may have been more pull-forward effect than we realized," the shareholders letter says. "In prior quarters with over-forecasts, we've found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well."

Seeking to reassure investors that they haven't lost their growth mojo, Netflix executives said they expect their US paid membership to "return to more typical growth" in the third quarter and international subs growth to pick up as well. Their new forecast calls for the company to add 7.0 million subs overall over the summer, up from 6.1 million a year ago, with the US contributing 800,000 new subs and the rest of the world 6.2 million.

"Our internal forecast still currently calls for annual global paid net adds to be up year over year," the company said. "There's no change to our 13% operating margin target for FY19, up 300 basis points year over year."

Nevertheless, Wall Street was not impressed. In the first 90 minutes of after-hours trading on Nasdaq, Netflix's share price was down nearly 12% to $362.44.

— Alan Breznick, Cable/Video Practice Leader, Light Reading

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