M+E Connections

Netflix still expects strong subscriber growth for its current fiscal year despite net subscriber additions coming in weaker than it and analysts had expected for the second quarter (ended June 30), according to company executives.

Customer additions continue to be up on a year-over-year basis, but it “wasn’t up as much as we thought it was going to be” in Q2, CFO David Wells conceded during
the company’s earnings webcast July 16. Netflix is, however, “still on track for a strong growth year,” he said.

“We had a strong but not stellar Q2, ending with 130 million memberships,” the company said in its quarterly letter to shareholders. Total streaming membership growth dipped slightly, to 5.15 million from 5.2 million in Q2 last year and was weaker than the company’s 6.2 million forecast. U.S. streaming additions slipped to 0.67 million from 1.07 million, but international streaming additions grew to 4.47 million from 4.14 million.

Despite the new subscriber miss, Netflix reported revenue grew to $3.9 billion from $2.8 billion, while profit increased to $384 million (85 cents a share) from $66 million (15 cents a share).

It was the first time in five quarters in which net subscriber additions came in below the company’s forecast for the U.S. and other markets, Sanford Bernstein analyst Todd Juenger pointed out on the webcast. In a research note July 17, Wedbush Securities analyst Michael Pachter said: “Since 2012, Netflix has missed its quarterly subscriber addition guidance on six occasions, with this quarter’s combined shortfall of 1.06 million total subscribers representing the widest delta relative to previous guidance.”

But Netflix executives played down the significance of the subscriber growth miss on the webcast, chalking it up to historical variability of subscriber additions across quarters.

For one thing, “paid net adds are up” from last year and are “forecast to be up on a year-over-year basis in Q3, and the fundamentals have never been stronger,” CEO Reed Hastings said, adding: “Viewing is setting year-over-year records [and] we are feeling very strong about the business.”

Netflix executives have also “seen this movie of Q2 shortfall before, about two years ago in 2016, and we never did find the explanation of that other than there’s some lumpiness in the business,” he said.

In prior years, Netflix always had “very strong growth” in Q1 and Q4 “relative to Q2 and Q3 and we think that pattern is going to happen again this year,” Wells said. Therefore, “we tend to focus on” subscriber additions over a “rolling 12 months” compared to the prior 12 months rather than a single quarter, he said. In addition, “more international adoption is going to drive really strong year-on-year growth” in markets outside the U.S., he predicted.

“We’re starting to turn the corner in many of the nations where our viewing is climbing up as we’re continuing to improve the programming” in those markets, Hastings also said.

He and other Netflix executives spent a relatively large amount of time on the webcast discussing its growth opportunity in India specifically, where its service launched about two and a half years ago.

“We’re really pleased with the progress” there since launch but “we just have a lot of work and a lot of opportunity ahead” there, Hastings said. Netflix is still “way behind” Mumbai-based Hotstar and YouTube in India, he noted, adding: “The advantages are tremendous in India for Internet viewing.” Netflix is “really getting some nice momentum in our India growth” but “we’ve got a long way to go to expand languages” there and become a “broad Indian product.” However, he said: “In terms of our beachhead, I’m very pleased with what we’ve been doing.”

Netflix also continues to invest in original programming and its “mobile experience,” the company said in its letter to shareholders. As an example of the latter, the company recently unveiled a “Smart Downloads” feature on Android for members that use its offline mode, which Netflix said was “particularly popular in emerging markets.”

Now, with that feature, “when members finish watching a downloaded episode, it will be automatically deleted, and the next episode will be automatically downloaded,” Netflix said. Smart Downloads works only when the device being used is connected to Wi-Fi, so “cellular data plans won’t be used, and device storage won’t be affected since the last watched episode will always be deleted first before the next episode is downloaded,” it said. Members also have the option to “toggle this feature on and off,” it noted.

The company is also expanding its partner-based bundle offerings, recently announcing deals with Telefonica in Spain and Latin America, as well as KDDI in Japan, Netflix said. Although most Netflix acquisition “happens by consumers signing up with us directly, bundles continue to be a high-performing additional acquisition channel [and] we expect to continue to add such deals with partners around the world,” it said.