Netflix Somewhat Pares Post-Q2 Stock Slide; Executives Optimistic
Netflix subscriber growth began to recover “in the first couple of weeks of Q3," said Chief Financial Officer Spencer Neumann after the company missed its Q2 sub targets with results Wednesday (see 1907170070). The slowdown in subscriber growth was across all of our regions,” said the CFO that evening. “We think the primary story was around seasonality and timing and nature of our content slate, but pricing played a factor.”
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In global regions “where we increased prices, we did see some elevated churn rates and lower retentions,” said Neumann. Price hikes averaging $2 monthly took effect in May for most standard- and premium-tier U.S. subscribers. The company had 130,000 paid net subscriber losses in the U.S. in Q2; it had projected 300,000 adds. Increased price-increase revenue "is very good for our business and ultimately for our members because we reinvest the bulk of that back” into content, he said.
“We're also seeing improvement in those churn rates,” with retention trending back toward “pre-price change levels,” said Neumann. Netflix forecast 7 million paid net subscriber additions in Q3, a 15 percent increase from Q3 2018.
There’s a “real battle” intensifying for “who will pay for content around the world, but it's not a zero-sum competition,” said CEO Reed Hastings. “Everybody gets that people will subscribe to multiple shows.” The advantage of calling the competitive environment “something catchy like the streaming wars” is that it “draws more attention,” and that will motivate consumers to “shift more quickly from linear TV to the streaming TV,” he said. The CEO said his employees, most of whom subscribe to AT&T's HBO, are inspired partly by its high-quality content.
Analysts reacted with some caution and optimism. The stock closed 10.3 percent lower Thursday at $325.21, paring some of its biggest losses from after Wednesday's close. Don't “make a mountain out of a molehill,” wrote Pivotal Research's Jeffrey Wlodarczak. “Churn, seasonality, and a less effective content slate drove the 2Q subscriber miss,” he said. “But these are all reversing in 2H in a big" way.
The subscriber miss "portends" a tough U.S. outlook as new competition comes online, wrote Wedbush's Michael Pachter: "We expect content spending to trigger substantial cash burn for many years. Notwithstanding four Netflix price increases in the last five years, cash burn continues to grow. Content migration and price hikes could cause a deceleration in subscriber growth." The “credibility” of the Q3 subscriber forecast is likely to come “under more than usual scrutiny given the magnitude of the Q2 miss, the loss of popular content in the H2'19 and the launch of competing services,” said Barclays analysts including Kannan Venkateshwar.
MoffettNathanson's Michael Nathanson said management's acknowledgment the price increase hurt subscriber growth in the quarter also "brings into question Netflix’s ultimate pricing power." So "as more studios pull content from Netflix, the platform moves from being a digital video store in the cloud with unlimited versions of all your favorite shows to a premium cable network on steroids."