Is Wall Street about to have second thoughts about one of its darlings? The streaming video giant’s share price — up more than 125% in 2015 — is down more than 7% in post market trading after it kicked off media and tech companies’ earnings season with a mixed report: It saw weaker than expected earnings and domestic subscription numbers for the three months that ended in September.
Netflix generated $29 million in net income, down 50.9% from the period last year, on revenues of $1.58 billion, down 29.3%. The top line was below the $1.59 billion that the company had forecast — and well below the $1.75 billion that analysts expected. Earnings came in at 7 cents a share — right where the company predicted, but a penny shy of Wall Street’s expectation.
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Netflix’s forecast “was high for the US and low for international,” CEO Reed Hastings and CFO David Wells say in a quarterly letter to investors. The company added 880,000 domestic subs, below the 1.15 million it expected, bringing the total to 44.8 million. The discrepency was “due to higher-than-expected involuntary churn (inability to collect), which we believe was driven in part by the ongoing transition to chip-based credit and debit cards.”
Investors also are carefully watching overseas growth. Netflix added 2.74 million subs, ahead of the 2.4 million it anticipated and the 2.46 million that the Street expected. That brings the total international sub number to nearly 26 million.
Hastings and Wells say that they recently jettisoned their deal to offer movies from Epix because “the films were non-exclusive, US-only, and offered in windows even further behind other premium Pay TV outlets.” Following the change “we’ve seen no material reduction in US feature film viewing as we have so many other films for members to enjoy.”
Netflix’s shelling out a lot for programming. Free cash flow declined $252 million in Q3 — vs a fall of $229 million in Q2. Execs say that was largely due to growing payments for original shows. “Exclusive first-window ‘only on Netflix’ content differentiates our service, allows us to leverage our global platform, reduces our dependence on third parties, and adds positive brand halo,” Hastings and Wells say.
Netflix borrowed about $1 billion early this year to help pay for content. The execs say the company is “likely to raise additional capital next year to fund our continued content investments.”
Looking ahead to Q4, Netflix expects to add 1.65 million domestic subscribers (below analysts’ projection for 1.73 million) with 3.5 million additions overseas (ahead of the Street’s 3.17 million). The company also looks to make 2 cents a share, half of the consensus forecast.
Executives will answer questions from Wall Street shortly in a conference call. Topics on investors’ minds include: How promising are growth prospects abroad, including Japan where Netflix introduced its service last month? Did Netflix just raise the standard rate for consumers by $1 because the service is so popular — or because it had to in order to cover rising programming costs? And how well does the company expect to do as competition intensifies from rivals lead by HBO, Showtime, Amazon, and Hulu?
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