Share price plunges after Netflix missed subscriber growth estimates – we’ve seen this all before

Netflix missed subscriber growth estimates
Netflix says it's not worried about losing content from Disney and others... it has its own original hits - with 117 Emmy Award nominations

The sky is falling! The sky is falling! Netflix missed subscriber growth estimates in the second quarter, sending shares of the streamer’s stock plunging in after-hours trading.

Wait, we’ve seen this all before…

Netflix (NFLX) still managed to add 2.7 million subs to its service, ending the quarter with more than 151 million paid subscribers. The company said it expects to add 7 million subscribers in Q3 and isn’t worried about long-term growth.

Q2 always has been a weak quarter for Netflix in terms of subscriptions, as it is for pay-TV operators. The April-June quarter is generally regarded as “summer doldrums.” In Q2 2018, Netflix missed forecasts by adding “just” 5.45 million subs, its weakest quarter of 2018, and the first time in five quarters it missed its subscriber guidance. Shares, predictably, tumbled.

The company saw a decline of 126,000 domestic subscribers, while adding 2.83 million to its international business. In its letter to shareholders, Netflix said all regions saw declines, adding that the worst performing regions were those where price increases occurred. The company said competition wasn’t a factor in the slower growth.

Still, Netflix subscription numbers were up 24% from a year ago, a remarkable increase considering the scale of the business. The increase in average revenue per user (ARPU) was more modest at 3%.

Why Netflix missed subscriber growth estimates

The company attributed some of the slower growth to an under-performing content slate in Q2 and an “overhang” from a raucous 1st quarter where it saw 9.6 million net adds. Q3, meanwhile, has gotten off to a very strong start, attributable, Netflix said, to the release of season three of its hit, Stranger Things.

In the past, Netflix has seen continued long-term growth despite a missed quarter, something it anticipates happening again this year.

Netflix did beat on its earnings, reporting GAAP EPS of 60 cents per share, 4 cents more than the street expected. Revenues were up 33% to $4.92 billion, in-line with the markets’ expectations.

Even in a bad quarter, content did well

On the content front, Netflix said the dramedy Dead to Me was watched by 30 million households in its first four weeks. And, it said, it’s being renewed for a second season.

When They See Us, a limited series based on the Central Park Five case, saw 25 million households stream it in its first four weeks. The series also has been nominated for 16 Emmy Awards.

More than 33 million households watched the docu-series Our Planet through its first four weeks. That show has received 10 Emmy nominations.

In June, Netflix premiered the Adam Sandler movie Murder Mystery. It’s the most watched Adam Sandler Netflix original film to date with more than 73 million households streaming it in its first four weeks.

Among other notable content:

  • The romantic comedy movie The Perfect Date saw 48 million households stream it in the first four weeks;
  • Thirty-two million HH watched Always Be My Maybe;
  • Season 2 of The Rain was among the largest returning seasons for one of our non-English language originals, and
  • Swedish series Quicksand was a new show that was highly watched both locally and globally

Worries about Disney, The Office’ and ‘Friends?’ Nah

While some analysts have harped on Netflix’s impending loss of some high-performing shows like Friends and The Office, along with Disney content, it’s important to remember that neither Friends nor The Office get the viewership overseas that they do in the US market. The company said even the biggest shows that are watched by millions of members “account for only a low single digit percentage of streaming hours.”

As to losing Disney content, this isn’t the first time the service has lost big-name content. It’s survived (thrived?) despite losing Starz and Epix with Sony, Disney, and Paramount films, as well as a number of Fox titles.

“When we drop strong catalog content… our members shift over to enjoying our other great content,” it noted.

Netflix has been steadily moving its content from semi-exclusive catalog and 2nd-window unbranded content to originals and pointed out that 40 of its original series, films and specials were nominated for 117 Emmy Awards. And, despite some studio defections, others – like Sony and Paramount – continue to ride what has been a gravy train for them, seeing Netflix as a distribution partner rather than as a competitor.

The bottom line…

Much has been made about the saturation of the SVOD market and, frankly, it has been overplayed, much like some pundits worries about competitors pulling some content back from Netflix.

The potential for growth – in the US and abroad – for Netflix, Disney, Amazon, Apple, WarnerMedia and all the rest is enormous. Netflix points out, for example, that it gets only 10% of consumers’ TV time – and less than that of their mobile time – in the US, the world’s most developed streaming market. There’s still plenty of room to grow.

And, it notes, like HBO, it remains advertising free… something it intends to continue.

“When you read speculation that we are moving into selling advertising, be confident that this is false,” it wrote to investors. “We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”


Stay tuned.

Jim O’Neill is Principal Analyst at Brightcove. You can follow him on Twitter @JimONeillMedia and on LinkedIn