Netflix plunges 14% after it misses expectations on revenue and subscriber additions

Netflix CEO Reed Hastings

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Netflix CEO Reed Hastings
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Getty Images for The New Yorker

Netflix’s stock got hammered after the bell after reporting that it added far fewer subscribers in the second quarter than Wall Street was expecting – and warned of another subscriber shortfall to come in the third quarter.

In after-hours trading Monday, Netflix’s shares were down $56.44, or 14.1%, to $344.04.

In a video interview with Sanford Bernstein analyst Todd Juenger, Netflix officials downplayed the disappointing subscriber numbers. Looking back over the last year, the company’s subscriber growth has been robust, particularly internationally, David Wells, the company’s chief financial officer, said on the video, adding that his outlook on the business hasn’t changed.

“We’re still on track for a strong growth year this year,” Wells said. “Maybe it’s going to come in a little bit differently from what we expected and what others expected.”

The company’s report had other disappointing news for investors. Its revenue also fell shy of Wall Street’s expectations, and Netflix offered a disappointing outlook for the third quarter.

But it was arguably its subscriber growth that most shook investors. The company’s stock has more than doubled over the last year in large part on heady expectations about its future growth, which is tied directly to the number of subscribers it acquires.

The disappointing subscriber numbers in the second quarter were a “‘near term gut punch’ to the Netflix bull thesis,” GBH Insights analyst Daniel Ives said in a research note after the company’s earnings report.

Here’s what the company reported and how its results compared with Wall Street’s average expectations and its year-ago results:

  • Revenue: $3.91 billion. Analysts were expecting $3.94 billion. In second quarter last year, Netflix posted $2.79 billion in sales.
  • Earnings per share: 85 cents. Analysts were looking for 79.4 cents a share. In the second quarter of 2017, it earned 15 cents a share.
  • Subscriber additions: 5.1 million total – 670,000 in the US and 4.47 million internationally. Analysts were expecting 6.3 million – 1.2 million in the US and 5.1 million internationally, according to Bloomberg. In the second quarter last year, it added 5.2 million – 1.1 million US subscribers and 4.1 million international ones.

And here’s the company’s outlook for the third quarter, compared with analysts’ forecasts:

  • Revenue: $3.99 billion. Analysts had projected $4.13 billion for the third quarter before Netflix’s report.
  • Earnings per share: 68 cents. Analysts had forecast 72 cents a share.
  • Subscriber additions: 5 million subscribers – 650,000 in the US and 4.35 million internationally. According to Bloomberg, analysts were projecting the company would add 5.93 million in the period – 875,000 domestically and 5.05 million internationally.

The company’s stock closed regular trading up $4.68 a share, or 1%, to $400.48 and was up nearly 150% over the last year.

While Netflix officials acknowledged that the company’s subscriber growth was lower than anticipated, they didn’t offer much of an explanation for why. The shortfall couldn’t be attributed to softness in any one country, Wells said. And it likely wasn’t due to the company’s recent price hikes, he said.

Company CEO Reed Hastings indicated that he believes the shortfall was just a fluke. Two years ago, the company also posted disappointing subscriber growth numbers, he noted.

“We never did find the explanation of that, other than there’s some lumpiness in the business,” he said, adding that Netflix “continued to perform after that.”

In a recent report, Wedbush analyst Michael Pachter noted that Netflix’s release schedule in the second quarter was light on original shows and warned that as a result the number of US subscribers it added in the period might fall shy of expectations. Juenger, the only analyst present in the interview, didn’t ask Netflix officials if the company’s release schedule might have played a role in its subscriber shortfall.

Despite the light release schedule, Netflix continues to invest heavily in content. In the second quarter, the company’s free cash flow – the difference between operating cash flow and capital investments – was in the red by $559 million. That was down from the $608 million in negative free cash flow the company recorded in the same period last year. But company officials said they still expect Netflix to see an outflow of $3 billion to $4 billion in free cash this year, meaning they expect its free cash flow to worsen in the second half of the year.

But Ives characterized the disappointing report as a “speed bump” and reiterated his bullish outlook on the company and his $500 price target on its shares.

“We believe Netflix has a number of growth levers which should fuel the company’s next phase of strategic penetration among both US and especially international consumers despite some softness seen in 2Q,” Ives said. He continued: “While the knee jerk reaction will clearly be negative from the Street’s perspective, we would be buyers of Netflix on this weakness.”