Netflix shares drop 16% on word of fewer streaming subs

Netflix misses the mark and projects lower Q4 guidance

It always seems like Netflix has an uphill battle to fight whenever it releases its quarterly earnings report.  It might just be me, because I still don’t trust them after all of the Price-Hike/Qwikster savagery of last summer.  I can forgive, I just can’t forget.

Let that be a lesson to you, entrepreneurial boys and girls.  I am not just another notch on your bedpost/balance sheet!

Netflix released its third quarter earnings on Tuesday, and shareholders aren’t too happy.  Netflix shares plunged 16% in after-hours trading to $57 after the company reported fewer than expected domestic streaming subscribers.  Netflix added 1.16 million new streaming subscribers in the U.S., bringing the total up to 25.1 million, which—to be fair—was in line with their guidance of 24.9-25.7 million.  But analysts were expecting Netflix to add 1.4-1.5 million subscribers. 

To make matters worse, the company is also low-balling its Q4 guidance.  Netflix expects to have 26.4-27.1 million domestic streaming subscribers by the end of the year, while the Street guidance was aiming for 27.7 million.

Naturally, that means that domestic streaming revenue also missed the mark, coming in at $556 million, while analysts were expecting $559 million.  Netflix kind of made up for it with slightly higher international revenue--$78 million—while the Street was expecting $77 million.  So altogether, Netflix’s global revenue was in-line with Street expectations, coming in at $905 million, with $8 million in net income and an EPS of $0.13.

There is a silver lining to Netflix’s gloomy cloud of disappointment.  In a survey of some 3,800 U.S. Internet users, Citi found that customer satisfaction has begun to improve for the first time since last summer’s “Apocaflix.”  Some 48% of Netflix subscribers said they were Very or Extremely Satisfied with Netflix’s service, compared to 44% and 45% in Q1 and Q2.  Additionally, 37% believe that streaming content has improved over the last 12 months, compared to only 16% who believe it has worsened.

Netflix’s primary selling point is its serialized TV content. 

“Our members can start right from the pilot episode of season one and watch multiple seasons at their own pace,” the company said in a letter to investors.  “Neither Redbox DVD nor the DVR truly offers this capability.  Buying expensive boxed-set DVDs or even more expensive seasons of $2 episodes on VOD are the only other options for enjoying this ‘discover a show’ behavior.  Our high relative advantage in TV shows is part of why our viewing is now about two thirds TV shows.”

Indeed, the company notes that of the top ten shows on TV, six are only on Netflix and are not available on Hulu, Amazon Prime Instant Video, or HBO GO.

Maybe that will bring some comfort to shareholders who have watched in horror as Netflix's market cap has plunged 80% in the last year and a half.

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