Netflix Slides After Net Subscribers Additions, Guidance Underwhelm

While the NFLX results for the quarter beat on the bottom line with EPS at $0.49 vs Exp. $0.40, and revenue coming right on top of expectations of $1.07 billion, the stock is currently sliding after hours. The reason: despite a massive spending ramp up in the quarter with substantial costs raked up for new content, the firm generated just 630K net total “member additions”, below the expectations of a 700K number, and well below recent quarters which saw subscriber growth ramp up to over 2 million in the past quarter. In fact, with all the content spending, NFLX added just 105K more total subs in the June quarter compared to a year ago.

And sub growth on a quarterly basis:

Netflix had a ready response for this:

We generally expect net additions in Q2 to be lower than prior year Q2 due to increased net-add seasonality as we grow. This Q2, however, was an exception, we believe due to the launch of Arrested Development. This show already had a strong brand and fan base, generating a small but noticeable bump in membership when we released it. Other great shows don’t have that noticeable effect in their first season because they are less established.

Indeed, and not only Arrested Development, but all the other shows the company launched and spent millions developing. However, the bigger question is how much demand NFLX has pulled forward if it already got the bulk of the low hanging fruit subs off the fence? And in that regard, NFLX own forecast was hardly very encouraging, because as it noted in its Q3 guidance…

… it now sees a flat change in the mid-projection of its paid subscribers compared to 2012, and an actual decline in the Total Subs additions compared to a year ago.

Looking at the balance sheet, we note a $47 million decline in cash offset by $102 million increase in short-term investments, facilitated in part by $29 million in new common stock issuance. Also, and like in times past, the bulk of the cash was generated from net working capital with some $54 million coming from balance sheet current assets and liabilities, adding to the $25 million from Q1.

Not surprisingly, NFLX’ attempt at a new pricing plan, with deja vu flashbacks to the disastrous efforts from the past, has not worked:

Our default $7.99 plan includes two simultaneous streams. We added an additional plan, at $11.99, that includes 4 simultaneous streams for the few large families that would otherwise need two separate accounts and partition their TVs between the two accounts. As expected, the take rate on this  large family plan is minimal. Our default limit of two simultaneous streams keeps password sharing with nonhousehold members to a minimum because it risks the account owner not being able to watch when they want.

Finally, and perhaps most important, will be the company’s disclosure on the call just how big its off-balance sheet liability has grown to. As a reminder, last quarter this number was $3.3 billion, up half a billion in one year, and represents 75% of the firm’s entire balance sheet.


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