Netflix's Q2 Results Panned By Critics As Subscribers Miss

Investor's Business Daily

Netflix (NFLX) disappointed investors late Monday with lower-than-expected subscriber growth, despite a slate of high-profile original shows, including the return of cult sitcom "Arrested Development.

Netflix, which made history last week when its political drama "House of Cards" was nominated for the best drama TV Emmy Award, a first for an Internet streaming service, said it earned 49 cents a share in Q2. That's way up from 11 cents in the year-earlier quarter and beat the consensus estimate of 40 cents. But sales just met estimates at $1.07 billion, up 20%.

For the third quarter, Netflix projected earnings per share at 43 cents, the midpoint of its guidance, vs. Wall Street's target of 45 cents. It didn't give revenue guidance. Analysts polled by Thomson Reuters expect $1.1 billion, up 22%.

Netflix shares were down 6% in after-hours trading Monday, after its report. Shares, which hit a nearly two-year high 270.31 on Thursday, fell 1% to 261.96 in the regular session.

Netflix added 710,000 net paid U.S. streaming subscribers in Q2, bringing its U.S. total to 28.62 million. By comparison, it added 2.44 million subscribers in Q1. In Q2 2012, it added 670,000.

Netflix added 680,000 net paid subscribers in international markets, bringing its total foreign subscriber count to 7.01 million.

For Q3, it expects to add 1.13 million paid streaming subscribers in the U.S., for a membership base of 29.75 million. Internationally, it expects to add 740,000 net paid subscribers, for a total of 7.75 million foreign members.

It ended Q2 with 35.6 million paid streaming video subscribers worldwide, up from 34.2 million in Q1.

Its legacy U.S.-only DVD-by-mail service continues to lose subscribers as the market shifts to streaming video alternatives. Netflix ended Q2 with 7.51 million DVD subscribers, down 470,000 subscribers from Q1.

With highly publicized shows like "House of Cards," "Arrested Development" and "Hemlock Grove," many analysts expected higher subscriber numbers.

"They missed on the domestic subscriber number," said Sterne Agee analyst Arvind Bhatia. "People were expecting a beat.

Netflix's results were a "mixed bag," highlighted by better-than-expected profitability, he said. "It was a good quarter, but not good enough. The most important metric was the subscriber number.

In a letter to shareholders, Netflix CEO Reed Hastings and CFO David Wells said Netflix generated a "small but noticeable bump in membership" from the debut of season four of the comedy "Arrested Development." That show had a "strong brand and fan base," so other original shows will not generate the same uptick, they said.

Amazon, Hulu Competition

Netflix executives noted the heightened competition from Amazon.com (AMZN) and Hulu. Hastings and Wells said Netflix, Amazon and Hulu are becoming as distinct as HBO, Showtime and Starz as they license exclusive content and produce their own originals. The result is less overlap of content between the streaming video services.

Of Netflix's top 200 titles last quarter, Hulu had 36 and Amazon 68, Hastings and Wells said.

Original content makes up a small percentage of Netflix's spending, they said. Of the $3 billion in content library net book value Netflix is amortizing, about 5% is for original shows, they said.

Netflix has original shows in the pipeline. Later this month, it will premiere "Mako Mermaids," a series aimed at teens. Later this year, it will launch the Ricky Gervais series "Derek" and season two of "Lilyhammer," followed by "Turbo: F.A.S.T. (Fast Action Stunt Team)," its first animated original series from DreamWorks Animation (DWA).

In 2014, it will premiere season two of "House of Cards," "Hemlock Grove" and "Orange Is the New Black," and debut "Sense 8" and original kid shows from DreamWorks.

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