Netflix plunges 14% after it misses expectations on revenue and subscriber additions (NFLX)

Netflix CEO Reed Hastings

Netflix’s stock got hammered after the bell after reporting that it added far fewer subscribers in the second quarter than Wall Street was expecting — and warned of another subscriber shortfall to come in the third quarter.

In after-hours trading Monday, Netflix’s shares were down $55.58 a share, or 13.9%, to $344.90. In earlier after-hours exchanges, they were down more than 14%.

“We had a strong but not stellar Q2,” company officials said in a letter to shareholders.

The company’s revenue also fell shy of expectations, and it offered a disappointing outlook for the third quarter. But it was arguably its subscriber growth that most shook investors. The company’s stock has more than doubled over the last year in large part on heady expectations about its future growth, which is tied directly to the number of subscribers it acquires.

The disappointing subscriber numbers in the second quarter were a “‘near term gut punch’ to the Netflix bull thesis,” GBH Insights analyst Daniel Ives said in a research note after the company’s earnings report.

Here’s what the company reported and how its results compared with Wall Street’s average expectations and its year-ago results:

  • Revenue: $3.91 billion. Analysts were expecting $3.94 billion. In second quarter last year, Netflix posted $2.79 billion in sales.
  • Earnings per share: 85 cents. Analysts were looking for 79.4 cents a share. In the second quarter of 2017, it earned 15 cents a share.
  • Subscriber additions: 5.1 million total — 670,000 in the US and 4.47 million internationally. Analysts were expecting 6.3 million — 1.2 million in the US and 5.1 million internationally, according to Bloomberg. In the second quarter last year, it added 5.2 million — 1.1 million US subscribers and 4.1 million international ones.

And here’s the company’s outlook for the third quarter, compared with analysts’ forecasts:

  • Revenue: $3.99 billion. Analysts had projected $4.13 billion for the third quarter before Netflix’s report.
  • Earnings per share: 68 cents. Analysts had forecast 72 cents a share.
  • Subscriber additions: 5 million subscribers — 650,000 in the US and 4.35 million internationally. According to Bloomberg, analysts were projecting the company would add 5.93 million in the period — 875,000 domestically and 5.05 million internationally.

The company’s stock closed regular trading up $4.68 a share, or 1%, to $400.48 and was up nearly 150% over the last year.

In their letter, Netflix officials acknowledged that the company’s subscriber growth was lower than anticipated but didn’t off much of an explanation of how it came up short. Instead, they noted that sometimes the company had exceeded its forecast and other times it hadn’t.

“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,” they said.

In a recent report, Wedbush analyst Michael Pachter noted that Netflix’s release schedule in the second quarter was light on original shows and warned that as a result the number of US subscribers it added in the period might fall shy of expectations.

Despite the light release schedule, Netflix continues to invest heavily in content. In the second quarter, the company’s free cash flow — the difference between operating cash flow and capital investments — was in the red by $559 million. That was down from the $608 million in negative free cash flow the company recorded in the same period last year. But company officials said they still expect Netflix to see an outflow of $3 billion to $4 billion in free cash this year, meaning they expect its free cash flow to worsen in the second half of the year.

But Ives characterized the disappointing report as a “speed bump” and reiterated his bullish outlook on the company and his $500 price target on its shares.

“We believe Netflix has a number of growth levers which should fuel the company’s next phase of strategic
penetration among both US and especially international consumers despite some softness seen in 2Q,” Ives said. He continued: “While the knee jerk reaction will clearly be negative from the Street’s perspective, we would be buyers of Netflix on this weakness.”

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