Netflix Misses U.S. Subscriber Growth Targets, Stock Plummets

Execs cite 'involuntary churn' relating to credit and debit card accounts for lower-than-expected domestic net adds

Netflix headquarters
Courtesy of Netflix

Netflix added a net 3.6 million streaming subscribers worldwide in the third quarter, but gained far fewer subscribers in the U.S. than expected — sending the company’s stock plunging more than 14% Wednesday in after-hours trading.

For the quarter ended Sept. 30, Netflix reported 69.17 million streaming subs. It added 2.74 million overseas, better than its previous projections, but added just 880,000 in the States compared with its forecast of 1.15 million for the quarter.

Netflix’s over-forecast in the U.S. for Q3 was “due to slightly higher-than-expected involuntary churn (inability to collect), which we believe was driven in part by the ongoing transition to chip-based credit and debit cards,” CEO Reed Hastings and CFO David Wells wrote in their quarterly letter to shareholders.

The execs added that through the first nine months of 2015, Netflix is slightly ahead of the same period last year, “and we expect to finish 2015 at about 2014 levels.” The company is on pace to add approximately 6 million members in the U.S., for the fourth consecutive year.

Netflix financial results were slightly below Wall Street expectations. It posted $1.74 billion in revenue and net income of $29.4 million (7 cents per share). Analysts expected $1.75 billion in revenue and earnings per share of 8 cents, per Thomson Reuters.

After falling 14% in after-hours trading Wednesday immediately following the earnings release, Netflix shares were down about 2.3% as of 6:15 p.m. ET.

Netflix’s deal with Epix expired Sept. 30, so subscriber cancellations over the loss of thousands of movies from Paramount, MGM and Lionsgate may not have fully hit the SVOD provider yet. Chief content officer Ted Sarandos said Netflix ended the Epix pact because its focus was increasingly on acquiring exclusive and original TV shows and movies.

With the loss of the Epix library, “So far, we’ve seen no material reduction in U.S. feature film viewing as we have so many other films for members to enjoy,” Hastings and Wells wrote in the letter.

Last week, Netflix raised the price of its most popular plan, which offers access to two HD streams concurrently, for new subscribers in the U.S., Canada and Latin America. For American subs, the “standard” plan will rise from $8.99 to $9.99 per month; existing customers will keep their current pricing for 12 months unless they’re covered by a price guarantee with a longer term.

Hastings and Wells said the price hikes will “improve our ability to acquire and offer high-quality content, which is the number one member request.”

For the fourth quarter, Netflix said it expects 5.15 million net adds total, comprising 1.65 million in the U.S. and 3.5 million internationally.

As for growing wariness among media conglomerates about licensing content to Netflix — and the heightened competition to snag subscription VOD rights to top TV shows — the execs suggested that there were a lot of fish in the sea.

“Some studios will choose to license content to SVOD services like Hulu, Amazon Prime Instant Video and Netflix. Others may not,” Hastings and Wells wrote. “We have a lot of content to select from.”

On the international front, following its Japan debut in September, Netflix is slated to roll out in Spain, Italy and Portugal next week. The company also announced plans to launch in South Korea, Hong Kong, Taiwan and Singapore in early 2016. The execs said Netflix’s international segment will operate at “around break-even through 2016,” when the company is aiming to be in some 200 countries, and that they expect it to deliver “material profits thereafter.”