UPDATED with analyst reaction: High-flying streaming service Netflix missed its own forecasts for subscriber growth in the second quarter, falling short by 1 million net additions.
Netflix added 5.2 million subscribers in the quarter, it said Monday, well shy of the the 6.2 million net new additions reflected in its own forecasts, which was the general neighborhood of most Wall Street analyst predictions.
The company’s stock dropped more than 13% in after-hours trading following a 1% gain during the trading day to a close of $400.48.
GBH Insights technology analyst Daniel Ives called the miss a “gut punch.”
“After handily blowing away Street expectations on subs in the last few years, this is a clear speed bump for Netflix as the international miss was most concerning, given this is the linchpin to the core growth thesis for the coming years,” Ives said, suggesting a “speed bump” rather than the start of a negative trend.
Netflix said the numbers don’t reflect underlying business issues, but rather more aggressive subscriber forecasts on its part, because the company dramatically understated the numbers in previous quarters. It gained 700,000 subscribers in the U.S. in Q2, a drop from a year ago’s figure of 1.1 million. Internationally, it added 4.5 million subscribers, up 8% from a year ago but short of forecasts of 5.1 million.
“The quarterly guidance we provide is our actual internal forecast at the time we report and we strive for accuracy, meaning in some quarters we will be high and other quarters low relative to our guidance,” said CEO Reed Hastings in his quarterly letter to shareholders. “This Q2, we over-forecasted global net additions which amounted to 5.2M vs. a forecast of 6.2M and flat compared to Q2 a year ago, as acquisition growth was slightly lower than we projected.”
Overall, the streaming giant added 130 million subscribers, which also missed Wall Street consensus projections of 131 million.
Hastings took a victory lap, noting that Netflix is leading artistically as well as commercially, with its creators earning enough Emmy nominations this year to break HBO’s 17-year run.
“The 112 Netflix nominations include five best series and best limited series nominations are spread across 40 different scripted and unscripted series, TV movies, limited series, documentaries, talk shows, comedy specials and series for kids,” Hastings noted. “This is a testament to the fantastic creators we work with across all forms of television.”
Second quarter programming highlights reflect the diversity of Netflix’s programming, from the sci-fi action series Lost in Space, which has been renewed for a second season, to Season 2 of one of its most popular (and controversial) originals, 13 Reasons Why.
Netflix’s production of non-English originals continues to ramp, with The Rain, a Danish thriller, becoming one of the biggest non-English productions yet, Hastings said in his note to investors. He called Lust Stories, a new Indian original film, “a major success” as the most-watched in any individual market within its first month.
Hastings also talked about Netflix’s growing movie slate, which plays the gap left by Hollywood’s increasing focus on superheroes and sequels. The romantic comedies Set It Up, starring Lucy Liu, Zoey Deutch, Taye Diggs and Glen Powell, and high school romantic comedy The Kissing Booth cracked IMDb’s top 10 chart of popular films.
“We also produce big event movies as well and we recently announced that Michael Bay, one of the most commercially successful action directors, will make his next film, Six Underground (starring Ryan Reynolds) for Netflix,” Hastings noted, name-dropping his way through other top directors making films for the streaming service including Martin Scorsese, Alfonso Cuaron, Susanne Bier and Chris Columbus.
Hastings acknowledged a changing landscape, with Amazon and Apple investing in content, and big-media mergers portending intensified competition from AT&T/Time Warner as well as from Fox/Disney (or Fox/Comcast).
“Our strategy is to keep improving,” Hastings said.
Paul Verna, principal analyst at eMarketer, said the “weak” results reflected the crowded landscape and the abundance of consumer choice. “This is isn’t entirely surprising given rising competition in the video streaming market, where Amazon, Hulu, HBO and others are gaining share of subscription video dollars at Netflix’s expense. The market is also heating up with new entrants in the SVOD space, including Disney and AT&T.”
Neverthless, Verna adds that eMarketer “expects Netflix to remain the clear leader among video streaming services in the U.S.,” in large part due to its “overspending” on programming.
Barton Crockett of B. Riley FBR injected a note of caution before Netflix reported its results, observing that the global growth in searches for new shows has flattened. Even searches for Netflix has slowed somewhat.
“Netflix, for all of its admirable success, has had stock performance that challenges the investing bromide that trees can’t grow to the sun,” Crockett wrote. “The Google search slowdown adds a little substance for those of us who are inclined to have some caution, relative to recently raised expectations.”
Execs will host their quarterly video conference call with investors at the top of the hour.