Netflix (NFLX) Has More to Worry About Than Its CFO Leaving
Shares of Netflix NFLX dipped Monday after the company announced that long-time Chief Financial Officer David Wells is set to step down. The decline is part of a double-digit downturn since Netflix reported its quarterly earnings results in the middle of July.
Wells joined Netflix in 2004 when the company was still a DVD rental and delivery firm. He took over as CFO in 2010, three years after Netflix officially launched its streaming platform. Netflix noted that Wells plans to help the company find his replacement before he leaves to follow charitable pursuits, not a new job at a big public company. “After discussing my desire to make a change with Reed, we agreed that with Netflix's strong financial position and exciting growth plans, this is the right time for us to help identify the next financial leader for the company,” Wells said in a statement.
Netflix closed fiscal 2010 with just over 20 million subscribers. That same year, when Wells took over as chief financial officer, the streaming firm reported full-year revenues of $2.16 billion. Netflix saw its revenues soar roughly 43% to hit $3.91 billion last quarter.
Clearly, Wells oversaw a massive period of positive growth and change at Netflix and helped determine the company’s plan to spend around $8 billion on new content in 2018 alone. “He skillfully managed our finances during a phase of dramatic growth that has allowed us to create and bring amazing entertainment to our members all over the world while also delivering outstanding returns to our investors," CEO Reed Hastings said.
The transition comes at an interesting time for Netflix. The firm is a Wall Street giant, boasting a market cap of roughly $150 billion. Netflix also helped bring about the new age of internet-based, streaming TV that has traditional media companies scrambling to catch up. However, the second quarter marked a possible turning point for Netflix that goes far beyond its CFO’s departure.
Netflix saw its adjusted earnings skyrocket from $0.15 per share to $0.85 per share in the second quarter, while its top line soared as well—both great signs for the firm and shareholders. Yet, shares of Netflix have plummeted just over 14% since it reported its Q2 financial results on July 16, on the back of somewhat alarming subscriber growth.
Netflix added 5.2 million new subscribers last quarter, which came in 1 million below its 6.2 million forecast. Plus, at 700,000, the company missed its 1.2 million U.S. growth projection. Meanwhile, Netflix added 4.5 million international subscribers, when it called for 5 million new subscribers outside of the U.S., which is not a great since its international markets are where the firm’s growth is supposed to come from going forward.
The company still closed the quarter with over 130 million subscribers worldwide, up roughly 25% from the year-ago period’s 104 million. Still, NFLX had topped its own subscriber forecasts in seven out of the previous nine periods, including beats in the trailing four quarters. The company had also crushed estimates recently. Netflix beat its estimate by 1 million in Q1 and topped its Q4 forecast by 2 million.
Netflix said that there was nothing wrong with its business and that it simply overestimated its subscriber growth. But investors might want to be a bit more skeptical going forward since the streaming market has become so crowded.
Netflix’s own long-term U.S. subscriber growth estimate helps demonstrate just how uncertain the company’s future is.
Netflix thinks its U.S. subscriber base can grow to between 60 to 90 million. The strange part here is that Netflix expects to add 5 million new subscribers during the third quarter, with 650,000 expected in the U.S. and 4.35 million internationally. Yet, NFLX ended Q2 with roughly 57.4 million U.S. subscribers, which means the company has practically no room to grow at the low-end of its outlook, while it could add more than 30 million more users in the U.S. alone, on the high side.
Investors should also remember that Amazon’s AMZN Prime Video and Amazon Studios offer an array of movies and TV shows. Meanwhile, Disney DIS and its box office hits and historic movie franchises, is set to launch its own streaming TV platform in late 2019. Apple AAPL is also set to enter the streaming TV market at some point in 2019.
Netflix is projected to see its full-year revenues surge by nearly 36% to $15.89 billion, based on our current Zacks Consensus Estimate. The company is expected to see its adjusted earnings skyrocket 115% to $2.69 per share. With that said, Netflix’s massive growth-based future seems a bit less certain than it was just a few months ago.
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