Netflix stock slammed after earnings, as subscriber growth and revenue fall short
Company’s guidance for new subscribers and
revenue also below consensus
Netflix Inc. posted weaker-than-expected second-quarter subscriber
numbers and revenue Monday afternoon, sending its stock into a sharp dive
during after-hours trading.
Netflix shares NFLX, -4.79% traded 12% lower in premarket action
Tuesday after the Los Gatos, Calif.-based company announced it added 5.15
million streaming users in the second quarter, a substantial drop from the 6.2
million estimate the company provided in April. The company added 4.47 million
international subscribers and 670,000 domestic subscribers, missing its April
estimates of 5.9 million and 1.2 million.
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The company reported a profit of $384 million, or 85 cents a
share, topping the FactSet consensus of 79 cents a share and up from $66
million, or 15 cents a share, in the same quarter a year ago. Revenue rose to
$3.91 billion from $2.79 billion the year before, just below the FactSet
consensus of $3.94 billion.
In a letter to shareholders, Netflix said the company had a
"strong but not stellar" quarter, acknowledging the company had
“over-forecasted” both domestic and global net subscriber additions and
“acquisition growth was lower than we projected.”
“We’ve
seen this movie of Q2 shortfall before, about two years ago in 2016, and we
never did find the explanation to that, other than there is some bumpiness in
the business, and continued to perform after that,” Chief Executive Reed
Hastings said during Netflix’s version of an earnings conference call, a
prerecorded interview with a single analyst who asks questions. The analyst on
Monday’s earnings call was Sanford C. Bernstein & Co.’s Todd Juenger.
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The question for investors, said GBH Insights analyst Daniel Ives,
was whether this was a one-quarter blip or signs of something more worrisome.
“I
think it’s more of a one-quarter issue that shouldn’t bleed into the next few
quarters, despite the company’s conservative guidance for September,” he said.
“In uber growth stories, especially in
technology, from Apple to Amazon to Netflix, you’re going to run into these
one- or two-quarter issues when they’re white-knuckle periods in the very
near-term.”
Netflix stock slammed after earnings,
as subscriber growth and revenue fall short
Company’s guidance for new subscribers
and revenue also below consensus
In its letter to shareholders, Netflix
blamed the strengthening of the U.S. dollar for its weaker-than-expected
international revenue. In April, the company predicted a $65 million-plus
impact on international revenue year over year, but the impact turned out to be
smaller due to the strengthening of the dollar against many international
currencies, the company said. Netflix does not hedge its revenue with
derivatives.
“We
slowly adjust pricing over time to mitigate forex moves over the longer term,
but when currency movements are rapid, they will affect our near term operating
margin,” Netflix wrote. “We’ll tend to outperform our near term operating
margin targets on dollar weakness and underperform on dollar strength.”
In its letter, Netflix acknowledged
rising competition from other entertainment companies. “HBO and Disney DIS,
+0.04% are evolving to focus on internet
entertainment services. Amazon AMZN, +1.27%
and Apple AAPL, +0.24% are
investing in content as part of larger ecosystem subscriptions,” Netflix wrote.
“We anticipate more competition from the combined AT&T/Warner Media, from
the combined Fox/Disney or Fox/Comcast as well as from international players
like Germany’s ProSieben and Salto in France.”
The company reiterated its commitment
to a broad slate of content “to serve a wide variety of tastes,” citing its
second-quarter debut of sci-fi action series “Lost in Space,” which was renewed
for another season, and the release of the second season of “13 Reasons Why.”
Other second-quarter offerings included follow-up seasons of “Santa Clarita
Diet,” “A Series of Unfortunate Events,” “Marvel’s Jessica Jones, “La Casa de
Papel,” “GLOW,” and “Marvel’s Luke Cage.” Netflix also debuted several romantic
comedies like “Set It Up” and “The Kissing Booth,” both of which were “watched
and loved by tens of millions of Netflix members,” according to the company.
In the earnings interview, Hastings
said Netflix does not have any plans to move into new genres like sports, news,
gaming or audio content. Movies and TV are “consuming every bit of energy and
excitement we have,” he said.
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The streaming giant also doubled down
on international content in the second quarter, releasing the second season of
“3%,” a sci-fi thriller from Brazil, as well as the Indian original film “Lust
Stories” and Danish thriller “The Rain," which the company said became one
of its “biggest non-English original productions yet, with viewing all over the
world.”
Some viewers and analysts have
wondered if Netflix’s rate of content output will mean a decrease in quality of
its shows and movies. But for now, critics seem to approve of the company’s
offerings, as Netflix last week nabbed the most Emmy nominations of any
network, breaking HBO’s 17-year streak of leading TV networks in nominations.
The company is focusing heavily on
marketing amid the content push, spending $576.7 million this past quarter and
just more than $1 billion in the past six months.
As for how that’s allocated, “only a
fraction of our spend is oriented around direct acquisition,” said Netflix
chief financial officer David Wells during the company’s earnings interview.
“The majority of the marketing spend — call it 80% to 85% — is oriented around
building title brands.”
Netflix also ramped up its spending on
technology and development, spending $317.2 million in the second quarter. Last
week, the company unveiled “Smart Downloads,” a feature aimed at users who
download episodes to watch on phones or tablets while on the go. The feature
deletes an episode after a user watches it, and then automatically downloads
the next episode while the device is connected to Wi-Fi.
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Analysts have voiced concern about
Netflix’s continuing negative free cash flow. During the second quarter, the
company burned $559 million more than it brought in, 8.8% less than the same
quarter last year, when it burned $608 million. Netflix said it continues to
anticipate negative free cash flows of $3 billion to $4 billion for 2018,
implying its content cash spending will be weighted to the second half of 2018.
Netflix completed its latest bond deal, raising $1.9 billion, in the second
quarter, and its gross debt balance now stands at $8.4 billion.
“We
continue to see debt as the most optimal choice, the most cost-effective source
of capital for the company,” said Wells. “Obviously we’d love to get to that
point where we’re organically and self-funding content, and we do see a point
where we can get there. But until we do, we see as debt as the right choice in
terms of cost of capital,” he said.
Netflix shares have seen a meteoric
rise of 109% so far this year, while the S&P 500 SPX, +0.44% has risen 4.7%.
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