Some painful after-hours for Netflix

Netflix (Nasdaq: NFLX) shares fell 26.4% to $330.00 in recent after-hours trading, offsetting the 22% rise in 2014. Wow.

reed-hastings

Reed Hastings, CEO of Netflix

Why?

  1. Subscribers. The Los Gatos, CA company released a Q3-2014 financial report showing that the company has grown to 53.1 million total members worldwide, but the addition of 3.02 million subscribers in the third quarter fell below the company’s previous prediction of 3.69 million. The reason for this is partially due to the price increase of $1 a month to $8.99 which “appeared to be offset for about two months by the large positive reception to season two of [its series] ‘Orange is the New Black.’” says Reed Hastings, CEO. This means their customer base is very sensible to price changes, and this limits their ability to increase investments importantly. Furthermore, the forecast was missed both regarding the US (980,000 vs. 1.33 million) and the international markets (2.04 million vs. 2.36 million).
  2. Financials. Netflix reported a profit of $59.3 million, or 96 cents a share, up from $32 million, or 52 cents a share, a year earlier. However, Netflix is only predicting earnings of 44 cents per share for the current quarter, which is far below the 91 cents per share that analysts had predicted, a 44% drop compared with last year’s fourth quarter, as losses in its international segment widen due to its aggressive European expansion. In September, Netflix launched in six additional European countries, including France and Germany, and this led to (narrower-than-expected) losses of $31 million in the international segment, even though they declare that the international markets it launched before this year—places like Canada, the Netherlands and countries in Latin America—are now collectively profitable. Besides marketing expenses and technology investments, Netflix’s costs are growing as it seeks to become a global service. Netflix’s streaming content obligations rose nearly 37% to $8.9 billion, driven by new content deals it entered in the quarter as part of its European expansion.Nevertheless, the company’s closely watched total streaming contribution margin rose to 18 percent from 10.4 percent a year ago, but Netflix also reported that it burned cash in the third quarter, to the tune of $74 million.
  3. Competition. Hours before Netflix released its latest financial report, Time Warner and HBO announced that the latter’s online streaming service, HBO Go, will be offered as a standalone option starting next year – something cord-cutters everywhere have been clamoring for in recent years. Netflix said it expects people to subscribe to both HBO and Netflix, since the two have different shows. It is “likely we both prosper as consumers move to Internet TV”, a market that has been growing consistently: nearly 45 percent of Americans stream television shows at least once a month – a figure that is expected to jump to 53 percent by 2018, according to eMarketer research, whereas Europe is also moving fast.  Netflix has grown to become the biggest stand-alone subscription programming service in the U.S., with 36.3 million paid members. HBO had 30.4 million at the end of the second quarter, according to SNL Kagan. While it has bigger profits than Netflix, HBO has been growing slower in terms of revenue. That is largely because HBO is a mature business while Netflix is still pursuing a costly global expansion. HBO’s operating income for the quarter ended in June was $548 million, while Netflix’s in the third quarter was $110 million. Mr. Hastings reiterated in the interview that the company plans to “take all of our profits and put them into international expansion” because “we see it as such a big opportunity.” The online content provider operates in about 50 countries.
  4. Bold announcements. Last but not least, a volatile market usually gets nervous and suspicious in front of bold announcements coming from a risky business. In fact, in the latest days the company announced a series of wave-making deals in the quarter, including a global licensing deal with Warner Bros. for the Fox series “Gotham.” The company also said it would back the sequel to Academy Award-winning “Crouching Tiger, Hidden Dragon” in a deal with Weinstein Co. allowing for Netflix to premiere the martial-arts movie on the same day it is released in select IMAX theaters world-wide, and causing the protests from many important theater owners. Netflix additionally struck a deal with comedian Adam Sandler to back four new feature films that will be exclusive to Netflix. And, in June, Netflix signed a deal with comedian Chelsea Handler to produce multiple stand-up specials for the site as well as a new online talk show. In addition, immediately after the HBO announcement, they said they will start streaming all 10 seasons of Friends, starting in January, and has also been rumored to be in the running for streaming rights to Seinfeld. Well, to an expert opinion, it may sound a little bit like they are trying to debunk the attention from the facts and figures.

All in all, the lesson here may be as follows: never raise expectations too high or the risk is a painful fall.

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