Netflix (NFLX) reported disappointing Q2 numbers after the closing bell and shares plunged 15%.
The company added just 160,000 domestic subscribers in the second quarter, which fell far short of the already reduced guidance of 500,000 additions. For the third quarter, the company said it now expects 300,000 domestic subscriber additions, compared with expectations for 750,000 to 800,000.
Meanwhile, the company added only 1.5 million international subscribers, compared with guidance of 2 million. For the third quarter, the company said it now expects 2 million international subscribers, compared with 2.7 to 2.85 million subscribers expected.
Guidance includes anticipated impact of the Olympics, which will attract the attention of many viewers
“We are growing, but not as fast as we would like or have been,” management said. “Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business.”
Revenue of $1.2 billion was inline was guidance while earnings per share of $0.09 beat expectations, but guidance on earnings per share for the coming quarter was seen as disappointing, at $0.05 versus $0.08.
Into the Monday’s close, the streaming company’s stock had already fallen 14% year-to-date compared with a rise in the S&P 500 of 6%. After plummeting amid market volatility in January, the stock was dealt another blow after slashing subscriber additions for the second quarter back in April.
International remains the focus
International growth has remained in focus, particularly after the January announcement that the company would launch in 130 countries.
“Growth in the global revenue base around a largely fixed-cost structure is the key dynamic,” according to Pacific Crest’s Andy Hargreaves. “Over the next year, we believe effective execution around the global expansion could drive global subscriber growth in excess of current investor expectations and illuminate the significant advantages to global scale.”
Any color on headway in China would provide a big boost to the stock as well.
Meanwhile, the US business — at current penetration levels above 50% of broadband households — is slowing. While low numbers were already backed into expectations, according to Hargreaves, Netflix missed even reduced expectations.
One key overhang for the business remains in the coming quarters, as millions of subscribers face price increases in the second and third quarters, according to SunTrust’s Bob Peck. This applies to subscribers that were shielded from last two price increases in May 2014 and October 2015 because they were already existing customers. They will now have to pay the higher rate.
Founder, chairman and CEO Reed Hastings said churn was unexpectedly high because of the advertised price increases.
“Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with our press coverage in early April of our plan to un-grandfather longer tenured members and remained remained elevated throughout the quarter,” he wrote in the company’s release. “With our large subscriber base, slight variances in retention versus forecast can result in significant swings in net adds, particularly in a seasonally small net add quarter like Q2.”
Netflix has doubled the number of shows it’s offering in 2016 to 31 from 16 in 2015.
The second quarter slate of originals was strong, including the fourth season of “Orange is the New Black” and the second season of “Unbreakable Kimmy Schmidt.”
Warding off competition
Bears have worried that some of the top content creators would cut ties with Netflix, but the company has recently signed original content licensing deals with Disney’s (DIS) Marvel, Warner Brothers and CW.
More Disney films will stream on Netflix in the first quarter, as Netflix has become the exclusive US pay TV home for content from Disney and its subsidiaries, Marvel, Lucasfilm and Pixar.
The bottom line: Netflix is a high-flying stock, but even as expectations came down into the second quarter report, they disappointed.
Nicole Sinclair is markets correspondent for Yahoo Finance.