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.”