Netflix Q1 2016 was another great quarter for the company, beating subscriber gain and revenue forecasts. This was not enough for Wall Street, where the company’s stock was hammered in after-hours trading. Two issues seemed to override the company’s great results.
Netflix added 6.7 million subscribers, and increase of 31% over the same quarter in 2015. In the US, subscribers increased 2.23 million, reaching 47 million overall. International performed better, creating an increase of 4.5 million, reaching 34.5 million overall. This performance is not as spectacular as it may sound.
Netflix released globally in January, adding an additional 120 countries. In February and March these new countries contributed very little in real gains, perhaps just a million or so above what might have otherwise been expected. Reed Hastings, Netflix CEO, explained this as being the result of the release only being available in English in those countries. Notwithstanding this limitation, the performance still seems weak.
Financial performance was right on analyst expectations. Thomson Reuters’ consensus estimates had Netflix earning $1.97 billion in Q1 and the company actually achieved $1.96 billion. Earnings per share, however, beat the streets estimates of 3 cents per share considerably, at 5 cents. This was not enough to keep the share price of Netflix growing. Shares have fallen from $109.59 just before the bell, to $99.90 in after-hours trading.
Why was Wall Street so upset with the results? One of the reasons is Netflix’ pessimistic view of the next quarter. The company estimated its subscriber additions would slow considerably, to just 500,000 in the US and 2 million internationally. Last year, Q2 delivered gains of 0.9M in the US and 2.4M internationally.
A much more likely reason for the pessimism is a dramatic increase in competition, particularly in the US. Amazon announced on Sunday that it will begin allowing people to subscribe to Prime Video as a standalone product for $8.99 a month, and to the full Prime membership (with 2 day shipping, video and other benefits) for $10.99 a month.
Other recent announcements suggest pay TV operators are getting serious about competing in the OTT space as well. Sling TV announced a second formulation of its Sling TV skinny bundle linear television product, based around Fox content. AT&T/DirecTV announced it would be launching 3 new OTT products.
When asked about this increased competition in the earnings call, Mr. Hastings was sanguine about it. Asked about the Amazon standalone video product, he commented: “It’s all part of the natural evolution from linear TV to Internet TV.” Later he was asked about the fact that HBO Now had gained 800,000 subscribers. He said he was surprised at how low the number was, as it is a great product.
Mr. Hastings seemed similarly unconcerned about the threat from linear television appearing online, as typified by Sling TV. He said linear is not interesting to Netflix, as he views TV channels as inherently local in orientation. Netflix, he said, is a global company.
nScreenMedia forecasts that Netflix remains on track to exceed 50 million subscribers in the US by the end of the year. International will almost equal this, at 49 million, in Q4. There is also a possibility the company will hit 100 million subscribers before the end of the year.
Why it matters
Despite solid growth both domestically and internationally, investors are pessimistic on the prospects for Netflix in the near future.
One reason for this pessimism is the very low guidance for Q2 the company provided.
Another more powerful issue is the increase in competition from Amazon and pay TV providers as they enter the OTT market.