Netflix Inc.’s share price fell by almost 16% in after hours trading following the statement that its goal of adding 7 million new subscribers during 2012 may not be reached. Netflix had predicted between 1 million and 1.8 million new subscribers for their streaming service for the third quarter, which an independent analyst close to the project expressed to Niigata Global, felt “would not be high enough to reach their year end target.”
While that means the total number of Netflix's net U.S. subscriptions shrunk by 320,000, the company still managed to increase the number of U.S. subscribers by 420,000. The Olympic Games are also expected to damage Netflix’s ability to sign up new subscribers for this quarter. Chief Executive Officer Reed Hastings said "We have enormous challenges ahead and no doubt will have further ups and downs as we pioneer Internet television. We are making progress in every market we serve."
The company says that they expect earnings of between a loss of 10 cents and a profit of 14 cents per share. The midpoint of that prediction is 2 cents per share. Analysts previously commented to Niigata Global they had predicted earnings of 7 cents per share for the quarter. The difference between subscriptions and subscribers is that "unique subscribers" counts people and not the types of accounts. So, for example, if people dropped their DVD subscription they might have remained as a streaming customer and weren't counted among the "net new subscription additions."
Netflix needs to keep high growth levels in order to meet their commitments to media partners Warner Bros and Disney amongst others, who provide the streaming content. Total U.S. subscriber numbers for Netflix online service (excluding their mail order DVD subscriptions) were just shy of 24 million at the year's mid-point, with another 3.6 million internationally.
Netflix is trying to recover from a disastrous period a year ago when the company raised prices and eventually tried to spin off DVD operations. Both moves were much criticized by customers. The price hike stuck but Netflix CEO Reed Hastings abandoned the attempt to split up the company. What it looks like now is that Netflix has a ways to go before putting the period behind it.
Netflix hasn’t yet named its next market, but it has said that it will be in Europe. That rules out Australia as another potentially attractive English-speaking market. It also suggests that Spain, which was long-rumored to be launching alongside the U.K. as Netflix entered Europe, could be its next target. Given the huge amount of Spanish-language content that it’s licensed to go after Latin America, Netflix could release a similar offering in that market.
“Despite the poor investor reaction, the underlying business is sound. They have healthy margins and are still growing their business” remarked a senior analyst in dialogue with Niigata Global.
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