Netflix shares plunged as much as 15% after-hours on Monday after the streaming-media company's subscriber-growth guidance rattled Wall Street.
While Netflix's results in the first three months of the year were strong, the company's outlook for the second quarter did not go over well with investors. Its forecast for Q2 international-subscriber growth were way below Wall Street targets.
Here are the key numbers:
- Q1 EPS (GAAP): $0.06 per share, above the Wall Street estimates of $0.04 per share, and equal to its year-ago earnings per share of $0.06.
- Q1 Revenue: $1.96 billion, up 24% year-over-year, and roughly in line Wall Street estimates.
- Q1 US subscriber growth (net additions): 2.23 million versus Wall Street estimates of 1.82 million.
- Q1 International subscriber growth (net additions): 4.51 million versus Wall Street estimates of 4.49 million.
- Q2 subscriber growth guidance (international): 2 million net additions versus Wall Street estimates of 3.45 million net additions.
- Q2 subscriber growth guidance (US): 0.5 million net additions versus Wall Street estimates of 0.55 million net additions.
In its quarterly letter to shareholders, Netflix blamed some of the shortfall in its international-subscriber growth to issues in the Australia/New Zealand market:
Our international forecast for fewer net adds than prior year is due to a tough comparison against the Australia/New Zealand launch. The ANZ growth spike in Q2 last year resulted in international Q2 net adds more than doubling year over year (from 1.12 million to 2.37 million). While ANZ is growing steadily this Q2, it is less than the launch spike last year. ExANZ, international net adds would be forecast up this quarter. International net adds are down sequentially both due to standard seasonality and our launch in 130 countries at very beginning of Q1 (so Q1 captured the initial surge of signups).
Netflix also threw cold water on any expectations that it could soon enter the China market, noting in the letter that "On China, we are continuing discussions but have no material update on our approach or timing. Whatever we do will have only a modest financial effect in the near term."
Netflix shares, which initially plunged as much as 15% in after-hours trading, regained some ground and were trading down roughly 10% at $97.69.
Expansion
In January, Netflix went live in 130 new countries on the same day, an aggressive expansion that put it in every major market except for China — around 190 in total. This expansion was meant to jump-start the company's subscriber growth, which many analysts believe will continue to decrease in the US in the coming months.
While Netflix beat Wall Street expectations for international additions for this first quarter of 2016, it missed badly on forecasts for the second quarter. A source of concern internationally has been the small library of content that Netflix has in certain newly launched countries, and some analysts had seen recent signs that Netflix wasn't catching on in certain prominent international markets.
Netflix's own narrative had focused on its compelling original content as an international draw, as it is much easier for Netflix to feature its "originals" in all territories. Netflix executives have characterized original content as the best investment for moving forward, and the company will release 600 hours of original content this year, including 31 original shows.
With regards to US subscriber additions for Q2, Netflix actually slightly raised its expectations, even while noting that over half of its US subscribers would be affected by a coming price hike:
With respect to ungrandfathering, currently, more than half of our US members pay only $7.99 or $8.99 for our $9.99 HD 2screen plan. We will phase out this grandfathering gradually over the remainder of 2016, with our longest tenured members getting the longest benefit.
