Netflix’s stock price is down about 26.4% in post market trading after the streaming company reported Q3 results with lower-than-expected subscriber growth, and as it forecast that profit margins will slip in Q4 due to growing content and expansion expenses. Net income at $59.3M in Q3 was +86.3% vs the period last year on revenues of $1.41B, +27.4%. The top line was right where analysts predicted, while diluted earnings, at 96 cents a share, beat Street forecasts by three cents. But U.S. paid streaming subscriptions increased about 1.18M since June, to 36.3M, shy of analyst predictions for a gain of 1.3M or more. International subs were up 1.48M to 14.4M, below some predictions for +2.4M.
“For the prior three quarters, we under-forecasted membership growth,” CEO Reed Hastings and CFO David Wells say in a letter to shareholders. “This quarter we over-forecasted membership growth. 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.”
The execs attributed the miss to the $1-a-month price hike it made this year for new customers. “Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the U.S.” That wasn’t evident earlier this year, they say, due to the enthusiastic response to Season 2 of Orange Is The New Black. They don’t think that competition from rivals including Amazon and Hulu played a role in the light sub growth numbers.
The execs offered a quick response to HBO’s announcement today that it will create a stand-alone service next year. “The competition will drive us both to be better,” they say. “It was inevitable and sensible that they would eventually offer their service as a stand-alone 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.”
On plans to produce original movies — starting in August 2015 with Crouching Tiger Hidden Dragon: Green Legend — the execs say that they can be more economical than paying Hollywood studios for their films. It’s also “consistent with the desires of the global on-demand generation to enjoy new movies without having to wait for months after they debut in U.S. theaters.” All of the major domestic exhibition chains have said that they won’t show Crouching Tiger because of the simultaneous release on Netflix. The company also has an agreement to release four Adam Sandler comedies only on Netflix beginning in 2016.
More to come later today when Netflix holds its quarterly meeting with analysts.