Netflix's Third-Quarter Subscriber Growth Disappoints
The firm’s move to raise prices and invest in marketing and original content is sound even if it has slowed subscriber growth in the short-term, says Morningstar’s Peter Wahlstrom.
Commentary
While revenue and EPS beat expectations, Netflix’s (NFLX) third-quarter results were disappointing due to lower-than-expected streaming net adds with 0.98 million domestically and 2.04 million internationally, versus guidance of 1.33 million and 2.36 million, respectively. While the management blamed the net add shortfall on increased prices, we maintain our favorable view of management’s decision to slowly raise prices. Netflix remains committed to investing in marketing and proprietary content, both of which we believe will offer solid returns. Despite the subscriber misses, the firm continues to build a solid foundation, ending the reporting period with over 50 million global paid streaming subscribers.
Management addressed Time Warner’s announcement that HBO would be launching a standalone OTT offering in 2015. The company has apparently expected this move by HBO and believes that the markets in the US and worldwide are large enough for multiple offerings including pay-TV, Amazon Prime, and Hulu.
The company also issued fourth quarter guidance below current expectations. Management guided for a $95 million operating loss for the international segment during the next quarterly reporting period, primarily due to the launch of six European markets (Germany, France, Austria, Switzerland, Belgium, and Luxembourg) in September. Management expects 1.85 million domestic net customer additions in the third quarter, down sharply from a year earlier, and international subscriber growth of 2.15 million, up from 2.15 million, due largely to the additional 66 million addressable homes added via the market expansions in September.
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