Netflix shares dipped more than 15% in after-hours trading Monday after the company released Q2 results that missed its streaming subscriber forecast.
Netflix added 1.7 million subs in Q2, expanding to more than 83 million worldwide, but missed its forecast of 2.5 million net new adds and came up short of the 3.3 million net adds generated in the year-ago period.
“Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to un-grandfather longer tenured members and remained elevated through the quarter,” the company noted in its Q2 2016 letter to shareholders. “We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering.”
Netflix said churn of subs who were actually un-grandfathered “is modest and conforms to our expectations,” the company added.
Netflix acknowledged that un-grandfathering, along with media coverage of it, can lead to moderate near-term membership growth, but believes that it also provides the company with revenue to invest in content that satisfies customers and, in turn, drives long-term growth.
Netflix expects to complete its un-grandfathering process in the second half of 2016. Netflix said it is convinced that its uniform three-tier pricing in the U.S. ($7.99 per month for standard-def, $9.99 for HD, and $11.99 for 4K/Ultra HD) is “working well for us and for new members, and our gross additions remain healthy.”
Netflix added 160,000 net streaming subs in the U.S. in Q2, extending that total to 47.13 million, and added 1.53 million international streaming subs, for a total of 36.05 million.
In Q3, Netflix expects to add 300,000 U.S streaming subs, and 2 million international streaming subs, giving it a global total of 85.48 million.
Neflix said it doesn't believe market saturation is a "key factor" in the U.S., as it is seeing similar performance in the same period in multiple countries with differing levels of Netflix market penetration.
Netflix posted total streaming revenue in Q3 of $1.96 billion (U.S. $1.2 billion and $758 million from international subs), up from $1.48 billion a year-ago. It’s predicting $2.15 billion in total streaming revenue for Q3 2016.
Netflix said it “slightly under-forecast the quarter” as it ended Q2 with operating income of $70 million and net income of $41 million, versus a forecast of $47 million and $9 million, respectively, citing lower-than-expected content and other costs.
Netflix noted that its Q3 forecast (2.3 million subs worldwide) includes the anticipated impact of the summer Olympic games and does not include any expected boost in the U.S. via Netflix’s integration agreement with Comcast to offer the SVOD service on the MSO’s X1 platform later this year.
On the international front, revenues rose 67% in Q2, but Netflix expects a contribution loss there of $95 million in Q3 “as improving profitability in our earlier foreign markets funds the investment in newer international territories.”
But don’t expect China to be added to this list anytime soon. “Unfortunately, this year the regulatory climate in China for our service has become more challenging,” Netflix said, noting, for example, that a Disney OTT service with Alibaba and an Apple movie offering were closed down. “We continue to explore options and, in the meantime, have plenty of work to do in our newly opened markets.”
Netflix said there’s no change in its view that its U.S. service can reach 60 to 90 million members.
Broadcast TV tests
Among other tidbits from Netflix’s letter, it shed more light on trials in which select episodes of original episodes are being offered on linear television in partnership with broadcasters.
For example, a week after its premiere on Netflix, the first two episodes of Netflix’s first French original series, Marseille, aired on TF1. Additionally season one episodes of Narcos and Club de Cuervos will be aired on Univision and Unimas, respectively, in the U.S.
“Through these tactics, we’re aiming to entice consumers to join Netflix to complete their binge. The danger is diluting the perception that Netflix original content is only on Netflix, so we are testing cautiously,” Netflix said.
On the tech front, Netflix began testing in-app payments on Android devices via Google Play in Q2, hoping it will help Netflix boost its ability to acquire new subs in international markets as it has done via in-app payments on iOS devices.
Netflix said it’s now partnered with more than 40 MVPDs worldwide.
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