Netflix beats on earnings, but shares slide on lower-than expected new customer sign-ups
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Netflix beats on earnings, but shares slide on lower-than expected new customer sign-ups

Streaming video on demand (SVOD) market leader Netflix reported earnings late last week that sent its share price tumbling. The financials exceeded expectations – but the reason for the precipitous decline in market cap is down to subscriber growth, which came in lower-than expected. Having just released its most successful piece of content ever, and on the back of a mammoth first quarter of new customer sign-ups, Netflix is confident it can put things right in the third quarter of the year.

Even after investors reacted to Netflix’s subscriber miss, the share price remains 26% up over the year to date

Netfilx July 22

Source: Yahoo Finance

Here’s the good news: Netflix was able to beat the Street’s expectations when it came to earnings, delivering 60 cents per share against consensus estimates of 56 cents per share. It also met expectations on revenue, which came in at $4.92 billion – a 26% rise, year on year. Where the company failed to hit its own guidance and analysts’ predictions is on new subscriptions to its streaming platform.

In its domestic market of the US, Netflix saw a loss of 126,000 subscriptions – analysts had hoped to see it add 352,000. You might think that signing up another 2.83 million people internationally would compensate for that miss – but analysts had hoped to see 4.81 million new international sign-ups.

Netflix thinks there are three obvious reasons for this: first, that its content slate wasn’t as strong throughout the quarter as it usually is. With a raft of new stuff on the way, that won’t be a problem going forward. Second, that it added so many people in the first quarter that “there may have been more pull-forward effect than we realised” (to quote a letter to shareholders). The third reason is that most of the cancellations seem to have come from places where Netflix raised prices. If price point is an issue, the chances are that people unwilling to pay the new fees have now cancelled their accounts, and we won’t see further cancellations for that reason.

With the third season of Stranger Things outperforming, and the final season of Orange is the New Black on its way, as well as a new season of The Crown, Netflix is confident enough that it’s raised guidance on revenue and subscriber adds for the next quarter.

Netflix’s chief content officer, Ted Sarandos, also took the opportunity to discuss the platform’s shift from licensing content towards making its own, saying: “We grow through that we believe by making these early investments in original programming and getting our consumers and our members much more attuned to the expectation that we’re going to create their next favorite show, not that we’re going to be the place where you can get anything every time. And we think there’s more value in that proposition than there would be in the kind of low-price aggregator.”

Disclosure

Dominion holds Netflix in its Global Trends Ecommerce Fund.


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