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5 Key Takeaways From Netflix’s Troubling Q1 Earnings Report

Netflix ( NFLX ) stock tumbled on Tuesday, a day after the Internet TV network posted mixed first-quarter results and gave disappointing guidance for the current quarter. Netflix shares were down 11%, below 97, in early afternoon trading on the stock market today . The stock fell below its 50-day moving average, a key technical support level. Late Monday, Netflix posted Q1 earnings per share that beat forecasts , but came up short on revenue. It earned six cents a share, up 20% year over year, on sales of $1.958 billion, up 24%. Analysts polled by Thomson Reuters were looking for three cents EPS on sales of $1.965 billion. For the second quarter, Netflix is targeting earnings per share of two cents. It did not give a revenue estimate. Wall Street had been modeling Netflix to earn five cents a share, down 17%, on sales of $2.117 billion, up 29%. IBD Take: Netflix has often been a highly rated stock, though now its ratings are mixed. The Los Gatos, Calif.-based company gained 6.74 million total streaming subscribers worldwide in Q1, topping its guidance for 6.1 million. It added 2.23 million streaming subscribers in the U.S. and 4.51 million in foreign markets. It ended the quarter with 81.5 million subscribers worldwide. What follows are five key takeaways from Netflix’s Q1 report. 1. Netflix Predicts Lowest Subscriber Gain In Two Years Netflix expects to add 2.5 million new subscribers in Q2, its seasonally weakest quarter. That would be its lowest new subscriber total in two years, even though Netflix has since rolled out its service worldwide, excluding China. Netflix projects that it will add 500,000 streaming subscribers in the U.S. and 2 million in international markets in Q2. Netflix faces increased subscriber churn in the U.S. as many longtime customers see a $2 increase in their monthly fee to $9.99 a month, starting next month. Over the last two years as Netflix adjusted its pricing, it grandfathered existing customers at the earlier rates. Meanwhile, Netflix’s international subscriber forecast for Q2 faces tough comparisons to the year-earlier quarter, when the company launched in Australia and New Zealand. 2. Netflix Will Roll Out U.S. Price Hike Gradually On a conference call with analysts to discuss Q1 earnings late Monday, Netflix CEO Reed Hastings said that the company plans to roll out price increases over the rest of the year to those U.S. customers given generous grace periods. Currently, more than half of Netflix’s U.S. subscribers pay only $7.99 or $8.99 for the company’s most popular plan, now priced at $9.99 a month. The plan provides HD video streams to two devices at a time. Netflix ended Q1 with nearly 47 million U.S. streaming subscribers. “We will phase out this grandfathering gradually over the remainder of 2016, with our longest-tenured members getting the longest benefit,” the company said in a statement. “We are rolling this out slowly over the year, rather than mostly in May, so we can learn as we go.” 3. New International Markets Will Take Time To Develop Well-heeled, better-educated consumers fueled Netflix’s early growth in overseas markets. The streaming video leader first grabbed the low-hanging fruit: consumers who enjoy English-language content and have international credit cards. Getting the next group of consumers to subscribe will take more work, the company said. Netflix needs to add more content in local languages and new payment options, Hastings said. “Over the next couple of years, as we further localize, we’ll be able to see more opportunity,” Hasting said. Netflix will premiere its first French original series, “Marseille,” a political drama starring Gerard Depardieu, globally on May 5, and a new Japanese original series, “Hibana,” globally in June. Netflix also is working on “3%” in Brazil, “Suburra” in Italy, “Dark” in Germany, an as-yet-untitled period series in Spain, a second season of “Club de Cuervos” from Mexico and another Mexican original series starring Kate del Castillo called “Ingobernable.” Plus, it is producing a Japanese anime series, “Perfect Bones.” 4. Netflix Has No Interest In Buying A Movie Studio Netflix executives on Monday’s conference call said that they had no interest in bidding on several movie studios reportedly in play, including Viacom ( VIAB ) subsidiary Paramount and Starz ( STRZA ). “It’s been 15 years we’ve been public and 20 years existing, and we’ve done no M&A,” Hastings said. “So I think that probably speaks for itself.” Netflix Chief Content Officer Ted Sarandos said Netflix is building its own production capabilities. Netflix has been successful growing its content production organically, so it doesn’t make sense to “juice it with M&A,” Hastings said. 5. Downloads Possible, But No Live Sports Or Virtual Reality Netflix is considering allowing customers in some markets with poor Internet infrastructure to download shows and movies for offline viewing. “We’ve been so focused on click-and-watch and the beauty and simplicity of streaming,” Hastings said. “But as we expand around the world, where we see an uneven set of networks, it’s something we should keep an open mind about.” But Netflix executives scoffed at the idea of offering live sports. They also said that virtual reality programming was not something the company is considering. VR for the consumer market likely will be focused on video game experiences for the foreseeable future, Hastings said. Bonus: Analysts React To Netflix Q1 Report At least 10 analysts cut their price targets on Netflix stock in response to the company’s Q1 report. Oppenheimer analyst Jason Helfstein lowered his price target on Netflix to 123 from 140 but reiterated his outperform rating on the stock. The company’s second-quarter guidance suggests slower-than-expected international subscriber growth, Helfstein said. “The magnitude of the global launch in Q1 (to 130 new countries) makes a hyperlocal content strategy impractical in the short term,” he said in a report. “As such, it appears near-term momentum will slow as Netflix decides which countries to focus on.” Pivotal Research Group analyst Jeffrey Wlodarczak cut his price target to 145 from 155 but kept his buy rating. Netflix’s Q2 international guidance was well below expectations, he said. Wall Street analysts on average were looking for 2.8 million new international subscribers, vs. the 2 million that Netflix forecast. “We had frankly anticipated more pent-up demand in these international markets (even with an initially less appealing focus on English-language programming and international payments), and now it appears that in these new markets Netflix will need to first invest in new localized content/improved payment mechanisms to accelerate growth, which will take time,” Wlodarczak said in a report. FBR analyst Barton Crockett raised his price target to 104 from 100 and maintained his market perform rating. But he called the company’s international subscriber guidance “jarring.”

Here’s How Apple Could Up Its TV Game With Skinny Bundle On Hold

Loading the player… Apple ( AAPL ) has put plans for its own “skinny” streaming bundle on hold, but the tech giant could expand its presence in the television space with the acquisition of DVR maker TiVo ( TIVO ), according to an analyst with Albert Fried. Reports surfaced in late March that TiVo was in talks to be acquired by Rovi ( ROVI ), a supplier of interactive program guides. While the analyst says that deal has merits, a TiVo acquisition by a consumer electronics company like Apple, Amazon ( AMZN ) or Microsoft ( MSFT ) is more attractive. That’s because consumer electronics firms “can better market and develop TiVo and TiVo’s ability to sell to roughly 80 million (subscribers) could be better exploited.” TiVo shares jumped 23% on the buyout rumors to retake their downward-sloping 200-day line. The stock is now looking for support around that level, rising nearly 1% on the stock market today . TiVo is trading 20% below its 52-week high. Apple tried to retake its 200-day line in Monday’s session, but closed the day just below that level. The stock has now fallen back below the 110 price level, edging up 0.4% intraday. Shares are trading about 18% below their all-time high reached at the end of last August. Amazon rose 1.8% intraday, while Microsoft ticked 0.4% higher. Meanwhile, Starz ( STRZA ) announced Tuesday it’s launching its own over-the-top streaming service, joining Netflix, Time Warner ( TWX )-owned HBO, CBS ( CBS ) and others in the pursuit of capturing the cord-cutting audience. The $8.99-a-month Starz service undercuts that of Netflix ( NFLX ), which is raising its price by $2 to $9.99 in May for “grandfathered in” customers. Starz rose fractionally while Netflix dipped 0.5%.

Netflix About-Face Smoothes Charter-TWC Approval Process

As goes Netflix, so goes regulatory approval of cable TV industry mergers? The notion that the Web video streamer is a bellwether for government approval could gain credence if Charter Communications ’ ( CHTR ) proposed acquisition of Time Warner Cable ( TWC ) gets the OK. Netflix ( NFLX ), which opposed Comcast’s proposed purchase of TWC, is fine with Charter’s deal. The Department of Justice and Federal Communications Commission thwarted Comcast ’s ( CMCSA ) TWC acquisition in April 2015. Netflix’s endorsement aside, the deal has plenty of opponents. Consumer groups and local phone companies in January stepped up criticism of a Charter-TWC merger. Satellite TV broadcaster Dish Network ( DISH ) and AT&T ( T ) had earlier warned about the combined Charter-TWC’s clout over Internet video. And even former TWC parent, media giant Time Warner ( TWX ), has voiced similar worries. Yet many analysts contend the Charter-TWC deal stands a high chance of approval, even if California regulators delay a closing until June. And Netflix’s stance is one big reason analysts expect approval. Bryan Kraft, an analyst at Deutsche Bank, cited Netflix when saying Charter has garnered support from “key tech constituents.” And said Craig Moffett, senior analyst at MoffettNathanson, in a research report: “Netflix’s 180-degree turn to support Charter speaks volumes.” Besides TWC, Charter is also seeking approval to buy privately held Bright House Networks. Charter must pay TWC a $2 billion break-up fee if the deal is blocked. On Charter’s Q4 earnings conference call early Thursday, Charter CEO Tom Rutledge said the company is aiming to close the TWC deal in late March. Charter has petitioned California regulators to move up a hearing date. He says Charter expects a green light from the Department of Justice and FCC. “We remain hopeful that the process can be completed in March,” Rutledge said. Charter stock closed down 3.7% Thursday at 169.93. Netflix Likes Charter’s Net Neutrality Stance What’s behind Netflix’s change of heart on cable consolidation? Critics say that a Charter-TWC deal would create a broadband duopoly. No. 1 cable firm Comcast and a combined Charter-TWC, which would be No. 2, would reach more than 70% of U.S. homes with broadband service, says a Barclays report. Combined, Comcast-Charter would have nearly 43 million high-speed Internet customers. Charter, whose biggest shareholder is John Malone’s Liberty Broadband, has aimed to disarm critics. For one, it is not following the lead of Comcast, which is forging ahead with “usage-based” data pricing — charging for data consumption like wireless phone companies do, with caps on monthly usage. In a growing number of markets, Comcast now charges an extra fee if customers go over a 300 gigabyte monthly limit. Charter, on the other hand, has promised not to impose data caps on customers. Netflix likes that, says Moffett. On Netflix’s Q4 earnings conference call last month, CEO Reed Hastings said, “I think it (Charter-TWC) would be a tremendous positive for the (over-the-top Internet TV) industry, because Charter has agreed to a multiyear, strong net neutrality policy, something no one else has publicly agreed to, and that would cover not only the Charter footprint, but the Time Warner cable footprint.” Charter has promised that it will provide free connections to its network for Netflix and others for three years. Interconnection fees were an issue in Netflix’s opposition to the Comcast-TWC deal. The FCC, meanwhile, imposed new public-utility-type regulation on broadband services this summer. These revised net neutrality rules are being challenged in federal court by Internet service providers. Net neutrality rules bar ISPs from throttling, blocking or prioritizing Web traffic. The worry is that the FCC will extend its authority over broadband pricing in the long run. Most of the conditions of Comcast’s purchase of NBCUniversal expire in 2018, so the Charter-TWC deal presents a new opportunity for the FCC to clamp down on the industry. While analysts expect approval of the Charter-TWC deal, they also expect that approval to come with many conditions. Some conditions could involve Liberty’s Malone. Liberty Broadband ( LBRDA ) would own 20% of the new Charter. Malone’s sprawling media and telecom holdings include stakes in Liberty Global ( LBTYA ), Discovery ( DISCA ), All3Media, Starz ( STRZA ) and Lionsgate ( LGF ). “Malone’s ownership of distribution and content assets globally implicitly has a scale larger than even Comcast, but with a much more fragmented ownership structure and working relationships,” says a Barclays research report. Analysts say that the FCC’s study of the Charter-TWC deal could go beyond ownership structure and board overlaps and into strategic relationships. Besides the FCC, state regulators have been taking a close look at Charter’s deals. In December, New York granted approval for the Charter-TWC deal. Charter agreed to expand its broadband service to more areas and provide discounts to low-income households. Charter, like Comcast, has expanded voluntary low-income programs. California, however, might not hold a key hearing on Charter’s TWC deal until June. “The California PUC (public utility commission) appears to be the long pole in the tent,” Mike McCormack, a Jefferies analyst, said in a report.