Netflix Blames Missed Sub-Growth Targets on Price Increase, as Stock Gets Hammered

Netflix

Shares dive 26% in after-hours trading on lower-than-expected subscriber additions

Netflix added 3.02 million overall streaming customers during the third quarter of 2014 — well under its previous projection of 3.69 million for the period, as both U.S. and international growth failed to meet its forecasts.

In after-hours trading, Netflix’s stock plunged 26%, falling $118.59 per share to $330.00. The stock had closed down 0.1% in regular trading, to $448.59 per share.

Netflix posted revenue of $1.41 billion, up 27% year over year and in line with analyst expectations. Net income of $59.3 million (96 cents per share) for the third quarter beating the Wall Street consensus EPS estimate of 92 cents.

For the three months ended Sept. 30, Netflix added 980,000 streaming subscribers in the States and 2.04 million overseas. The company previously had said it anticipated adding 1.33 million U.S. and 2.36 million international subscribers for Q3.

CEO Reed Hastings and CFO David Wells said in a letter to shareholders that, “As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago. Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher-adoption markets such as the U.S.”

In May, Netflix raised rates for new streaming subscribers — by $1, to $8.99 monthly — while promising existing subs their pricing will not change for two years.

In hindsight, according to Hastings and Wells, the effect of the price hike through late Q2 and into early Q3 appeared to be offset for about two months by the “large, positive reception” to season two of “Orange is the New Black.”

“We remain happy with the price changes and growth in revenue and will continue to improve our service, with better content, better streaming and better choosing,” the execs wrote in their letter.

Hastings, in a later video interview with Wall Street analysts Wednesday, said, “We expect to miss pretty frequently.” The company’s forecasts are “the midpoint — we’ll be a little above that, a little below that every quarter.”

Overall, Netflix ended Q3 with 53.06 million streaming subs worldwide (37.22 million in the U.S. and 15.84 million internationally). Netflix is forecasting adding 4 million streaming customers in the fourth quarter of 2014, with 1.85 million in the States and 2.15 million overseas.

According to Hastings and Wells, for the prior three quarters, “we under-forecasted membership growth. This quarter we over-forecasted membership growth. We’ll continue to give you our internal forecast for the current quarter, and it will be high some of the time and low other times.”

Earlier in the day, Netflix’s stock slipped after HBO announced plans to launch a standalone, over-the-top video service, although shares recovered to finish closing down only slightly during regular trading.

On the earnings webcast, Hastings downplayed the competitive threat posed by HBO’s move. “It’s not much of a change in the direct competitive landscape,” he said. “I don’t think it’s a significant impact on the consumer level.”

Netflix execs were also asked about the company’s recent movie deals: Its pact with The Weinstein Co. to launch the sequel to “Crouching Tiger, Hidden Dragon” day-and-date with Imax theatrical release in August 2015 and its four-picture deal with Adam Sandler.

Content chief Ted Sarandos called Sandler “a real global superstar,” and noted that Netflix’s data shows all of his movies have performed well in markets worldwide, “defying conventional wisdom that American comedy doesn’t travel.”

Asked about the backlash from major theater chains about the day-and-date plan, Sarandos said there’s not much financial impact for Netflix if “Crouching Tiger 2″ doesn’t play in Imax theaters. “The key to it is, we want to give consumers the choice to see it on the big screen. It’s not a low-budget, direct-to-video release,” he said. Sarandos said the negative reaction from the exhibitors was expected, but, he added, “the real story will unfold on Aug. 28 [2015]… we’ll see if it’s on those screens or not.”

Sarandos also said “Orange Is the New Black” has been the most-watched show in France and Germany, where Netflix launched service four weeks ago. However, Netflix doesn’t have streaming rights to “House of Cards,” its other high-profile original series, in those countries.

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