Netflix Inc.managed a second-quarter beat on financials, but it still got pummeled inafter-hours trading when it reported slower-than-expected user growth.
The addition of just 1.7 million members likely drove thenegative sentiment. The company had anticipated2.5 million second-quarter additions, guidance that was already considereddisappointing at a time when the investors are questioning Netflix's ability todeliver growth, and its stock dropped again by double digits in after-hourstrading when the company missed that guidance.
Netflix's executives blamed the shortfall on recent priceincreases rolling out to all customers. The company had allowed existingsubscribers to maintain their current subscription terms when it announcedprice increases, but in April it started to terminate that grandfather period,requiring existing members to accept more expensive plans or cancel service.
"I think what we're seeing is change resistance,"CEO Reed Hastings said during a July 18 earnings webcast.
He explained that there has not been much of an affect innew member additions. Rather, the shortfall was largely due to old memberschurning out. The un-grandfathering period will wrap up near the end ofNovember, the executives said.
Also a headwind, Netflix has had some difficulty withmembership additions during the Olympics season, which will begin in August.Wells said he believes this will represent a small but meaningful impact.
The executives pointed to the fact that theun-grandfathering and the Olympics headwinds are temporary forces, and growthshould return to a more normal pace going into 2017.
Looking at tailwinds, analysts on the webcast asked aboutNetflix's deal with Walt DisneyCo. to start addingpopular movie content beginning in September. They also asked about the upcomingdeal with Comcast Corp.to integrate Netflix on the MVPD's set-top boxes. The executives replied toeach of these events with moderated optimism.
"The movies are about 10 months old, so we don't expectthem to drive new subscribers," Chief Content Officer Ted Sarandos said onthe webcast. The new Disney content will unroll slowly on the website over 12to 18 months, and he noted that the deal is more about pleasing existingcustomers than adding new customers.
As for Comcast, Hastings said his team is "very excited"about the prospect, but believes that the benefit on member growth will bemodest. The company already counts many Comcast households as customersalready, with many using smart TVs and other devices to more easily access theNetflix platform anyway.
Rather, the addition of new original content and newmarkets, as well as the continued adoption of digital streaming television,will support the most long-term growth.
For international markets, new roll-outs are moving forwardin a similar fashion as prior new markets. Growth will likely be lumpy, withperiods of acceleration and deceleration as those markets develop to maturity,Hastings said.
More broadly, he pointed to the continued development of theInternet television market — the proliferation of virtual MVPDs, smarter smartTVs, OTT services and mobile streaming — as the biggest growth engine for thecompany.
"All these are building out the Internet ecosystem, andI don't see why — 10 to 20 years from now — why every American household isn'tsubscribing to Netflix," the CEO said.
The only challenge he noted was potential competitivepressures, but today, even with the rise of more digital bundles and hybridservices like Hulu LLC'sexpected release of an OTT service that includes live streaming, Hastings saidhis team is not concerned. The new Hulu product is an extension of a marketthat DISH Network Corp.'sSling TV has already developed, so while other services like Sling andSony Corp.'sPlayStation Vue might challenge each other, there is no new area of competitionthat Netflix has not already addressed.
Looking at the quarterly numbers, the company deliveredstreaming revenue of $1.97 billion, up significantly from $1.48 billion in theprior-year quarter. That penciled out to net income of $41 million, or 9 centsper share, compared to net income of $26 million, or 6 cents per share, in theyear-ago period.
The S&P Capital IQ consensus normalized EPS estimate forthe second quarter was just 2 cents per share, the same as the company's ownguidance for the quarter.
Despite beating the forecast, Netflix was unable to deliveroperational performance in step. It added just 160,000 U.S. streaming members,which totaled 47.1 million members by the end of the quarter, and it added just1.5 million international members, bringing that total to 36.1 million.
The company had guided for 2 million new internationalmembers on the back of an aggressive global expansion, and it expected 500,000new U.S. members, for a total of 2.5 million new members platform-wide.
Looking forward, Netflix expects total net streamingadditions of 2.3 million in the third quarter, with 300,000 of those comingfrom the U.S. On financial guidance, the company is looking for EPS of 5 centsper share on net income of $22 million.
The S&P Capital IQ consensus GAAP EPS estimate for thethird quarter is 7 cents per share.