Netflix hit by weak Q2 subs forecast

Netflix reported a record number of new subscribers in Q1, but its share price dropped more than 7% in after-hours trading after it issued a weak forecast for the current quarter.

Netflix said it expects to add 2.5 million members in the second quarter of 2016 – two million internationally and 500,000 in the US. By comparison, in Q2 2015 it added 2.4 million international members and 900,000 in the US – a total of 3.3 million.

The SVOD service said that its Q2 US forecast was in line with previous years, but acknowledged a “modest impact from un-grandfathering” – the process of upping legacy users’ price plans from an introductory US$7.99 or US$8.99 per month to Netflix’s now standard US$9.99 for its HD, two-screen plan.

Currently more than half of Netflix US users pay a reduced rate for its US$9.99 offering – something that Netflix said it will phase out gradually over the remainder of 2016.

Internationally, Netflix said that it expects to add less users in Q2 2016 than a year earlier due to a “tough comparison against the Australia/New Zealand launch”.

“The ANZ growth spike in Q2 last year resulted in international Q2 net adds more than doubling year over year [from 1.12 million to 2.37 million)] While ANZ is growing steadily this Q2, it is less than the launch spike last year,” said Netflix in its quarterly letter to shareholders.

Netflix said that its launch in 130 new countries at the beginning of this year meant that its Q1 results “captured the initial surge of sign-ups”, with net additions expected to drop sequentially in Q2 as a result.

Announcing its Q1 2016 results, Netflix said that it added a record 6.74 million subscribers in the quarter – up from 4.88 million in Q1 2015.
The bulk of these additions were international users, with 2.23 million new members logged in the US – down slightly from the 2.28 million new members recorded in Q1 2015.

International revenues grew 57% year-on-year to US$652million. International losses widened year-on-year to a loss of US$104 million – though Netflix said that this was “better than forecast due to the timing of content spend”.

In the US, Netflix’s revenues rose 18% year-on-year to US$1.16 billion. It attributed this to 14% growth in average paid memberships and a 3% increase in ARPU. US contribution profit grew 32% year-on-year to US$413 million.

On an investors’ call following the results release,Netflix’s chief content officer, Ted Sarandos, said the streaming service was “increasingly the studio and the network” for its original shows.

“We are building that efficiency in-house,” he added. “[Multi-cam sitcom] The Ranch, which just premiered a few weeks ago, is a Netflix-produced show, and we’ll be doing a lot more of those.”