Netflix (NFLX, Financial) reported earnings after the stock market closed on Monday, and shares fell 13% in after hours trading to $85.90. Investors sold the stock as the company badly missed its own estimates. The key metric analysts focused on was net subscribers. The company added 1.7 million members versus the forecast of 2.5 million members.
Management discusses quarterly results in the video below. Highlights for the second quarter include:
- Revenue of $2.11 billion vs. $1.96 billion for second quarter 2015.
- Net income of $40.76 million vs. $26.34 million for second quarter 2015.
- EPS of 10 cents vs. five cents for second quarter 2015.
- Total subscribers ended at over 83 million members at the end of the second quarter.
- The company blamed churn (another term for cancelations) as the primary reason for weak subscriber growth. Netflix ended grandfathering of prices on existing customers. In other words, it raised prices and people canceled.
- The company thinks churn originated from price increases and not other factors like increased competition becauses it experienced churn across geographies without competing video services.
- What this suggests is that Netflix does not have pricing power.
- U.S. revenue grew 18% year over year with domestic average selling prices growing 4.5% year over year.
- U.S. contribution margin was 34.3%.
- The company mentions that there is more competition like CBS All Access, Seeso, Amazon Prime Video, Hulu and YouTube Red. However, it believes that all of these services will grow at the expense of linear TV.
- Investors looking for growth from China will be disappointed. “Unfortunately, this year the regulatory climate in China for our service has become more challenging. Disney’s streaming service, launched in conjunction with Alibaba, was closed down, as was Apple’s movie offering. We continue to explore options and, in the meantime, have plenty of work to do in our newly opened markets,” the company said.
- I wrote an article last year about how Netflix is ridiculously overvalued. My opinion has not changed. I remain bearish on the economics of the business as competition will increase and content costs will rise.
Disclosure: The author does not own any stocks mentioned in this article.
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