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Netflix Faces Cost and Subscriber Growth Concerns, Yet Again

Posted on Friday, Oct 16th 2015

After a stellar second quarter that Netflix (Nasdaq: NFLX) reported earlier this year, their latest results were a big disappointment. Subscriber growth in the US fell short of market projections, and the skyrocketing international growth in subscribers could not help the stock from falling.

Netflix’s Financials

Q3 revenues grew 23.3% over the year to $1.74 billion, falling short of the Street’s forecast of $1.75 billion. EPS of $0.07 was in line with the market’s projections for the quarter.

Among other statistics, global membership grew 3.62 million over the year to 69.17 million. During the quarter, it added 880,000 subscribers in the US, missing its own projections of 1.15 million additions. The market was looking for an addition of 1.25 million subscribers in the US. International growth was impressive as they recorded 2.74 million net additions compared with the 2.45 million forecast by the market.

Netflix blamed the miss in its subscriber base to the introduction of chip-based credit cards. The new chip-based credit cards are designed to prevent fraud. But the introduction of these cards did not go seamlessly for their payment gateway, resulting in an “involuntary churn” due to its inability to collect from its clients.

For the current quarter, Netflix forecast an EPS of $0.02, again short of the market’s expectations of $0.04.

Netflix’s Earnings Concerns

Netflix continues to see strong pressure on its earnings and things aren’t improving soon enough. In the previous quarter, an accounting policy change on the amortization of its licensed content contracts has hurt its profitability.

During the final quarter this year, Netflix plans to launch in three more countries – Spain, Italy, and Portugal. International expansion continues in the next year with South Korea, Hong Kong, Taiwan, and Singapore planned for launch in early 2016. It is currently targeting a breakeven fiscal 2016 for their international business and is planning on turning profitable after that.

Netflix is addressing some of these profitability concerns by increasing the prices for their subscriptions. Last week, it announced price increases in most of the countries. In the US, it raised the prices for the High Definition, 2-screen-at-a-time plan by a dollar to $9.99 for new customers. The price hike will hit the existing customers next year. All other pricing plans remain unchanged for now.

Meanwhile, it continues to add to its original content library and is now focusing on locally produced content as well. Last quarter, it released Club de Cuervos targeted for its Mexico market. The series has received promising reviews from other Spanish speaking population as well. It is now looking to produce additional local content for Mexico, France, Italy, and Brazil. Within movies, more original content is planned as well with the release of Beasts of No Nation this week and others like The Ridiculous Six planned for later this year.

Its stock has slid close to 10% and is trading at $101.9 with a market capitalization of $43.06 billion. It touched a 52-week high of $129.29 in August this year.


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