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Netflix Stock Tumbles on Big Subscriber Miss

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Netflix (NFLX) stock tumbled after the streaming giant announced its second-quarter financial results, which featured a big miss on paid subscribers.

After the bell Wednesday, Netflix said that its second-quarter revenues rose 25.9% YoY (year-over-year) to $4.92 billion—marginally below analysts’ expectation of $4.93 billion. The revenues accelerated for the first quarter after decelerating for three consecutive quarters. The acceleration was due to higher subscription rates in the US and some other markets.

However, Netflix reported a disappointing 2.7 million paid subscribers worldwide. In comparison, the company added an impressive 18.4 million subscribers globally in the previous two quarters.

The paid subscribers worldwide were much lower than the company’s guidance of 5 million. Netflix’s guidance is usually conservative. Meanwhile, analysts expected Netflix to add 5.3 million subscribers. Now, the company has over 151.5 million paid subscribers globally.

Netflix shares tumbled 10% in after-hours trading on Wednesday. The stock was heading lower in early trading on Thursday.

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Netflix only added 2.7 million paid subscribers worldwide

Netflix’s earnings were impacted by slower growth due to higher subscription prices.

According to the company’s letter to shareholders, it missed the subscriber forecast due to slower growth in regions with price increases.

If higher prices continue to dissuade subscribers from continuing their subscriptions, Netflix might not be able to hike rates in the future without churn. The scenario would weaken Netflix’s case considerably, especially given how much money the company has been spending on content.

However, Netflix expects to add 7 million paid subscribers during the third quarter.

Netflix said that the miss in the subscriber count wasn’t due to competition. However, the company will be facing stiffer competition going forward. Apple and Disney are slated to launch their own streaming services this year. NBCUniversal and Time Warner are also preparing to launch their own services.

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Revenue growth is expected to accelerate

Netflix said its revenues rose 22.2% YoY in the first quarter. The company’s revenues rose 27.4% YoY and 33.9% YoY, respectively, in the fourth and third quarters of 2018.

Netflix expects to generate $5.25 billion in revenues in the third quarter—a 31.3% rise YoY. The increase will mainly be due to higher subscription rates across all of its plans in the US and some other markets.

Netflix posted a net profit of $614.7 million in the second quarter. The net profit has fallen 8.9% YoY. The company made $1.36 per share on a diluted basis. Netflix’s interest payments increased due to mounting debt.

Netflix’s earnings will likely remain low in the coming years. The company spends billions of dollars on content to bring in and retain subscribers.

Netflix lost 126,000 subscribers in the US

Netflix lost 126,000 paid subscribers during the second quarter. Now, the company’s US subscriber count is 60.11 million. Netflix’s domestic market accounts for less than 40% of its global paid subscribers. The company’s US subscribers experienced the first quarterly drop in eight years.

Netflix’s US base is close to saturation. The bad news is that domestic growth could stall. US subscribers will have more options at their disposal.

However, Netflix expects to add 800,000 paid US subscribers in the current quarter.

Netflix makes more money per paid subscriber domestically than it does in international markets.

During the second quarter, the company made $12.75 per paid subscriber a month in the US—11% growth sequentially. Meanwhile, Netflix only made $9.3 a month per paid subscriber overseas.

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Netflix added 2.83 million paid subscribers overseas

Netflix continued to see decent growth outside the US. However, the company only added 2.83 million paid subscribers during the second quarter.

The number of additional paid subscribers was a steep decline from the addition of 7.86 million paid subscribers outside the US during the first quarter. Netflix’s international paid subscriber count is 91.46 million—up 33.7% YoY.

Over the past several quarters, the company’s overseas subscriber base has been growing ~40% YoY. However, the growth has slowed slightly in the last few quarters. Meanwhile, Netflix’s domestic subscriber growth has been slowing.

Netflix’s strong international growth has been driving its recent growth. The company expects to add 6.2 million paid subscribers overseas in the third quarter. Netflix still has room to grow internationally. The company doesn’t face the same competition internationally that it faces in the US. Also, Netflix hasn’t reached its saturation point internationally.

The company has been spending significantly to produce English and foreign language content to attract international subscribers.

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Netflix might lose popular shows like Friends but that’s okay

Netflix said that it had a strong start to the third quarter. The company launched the third season of its popular original, Stranger Things. The company is slated to release the new seasons of popular original shows like Money Heist, The Crown, Orange Is the New Black, and Bojack Horseman in the second half of this year.

Netflix has been hiring top talent in order to keep producing quality content.

However, Netflix will lose extremely popular acquired content like Friends and The Office. While the exodus is a blow for the company, it just needs to keep producing quality content.

This year, Netflix has started doing something original. Now, the company discloses the viewership on some of its most popular original content.

Earlier this year, Netflix disclosed that an impressive 80 million households—a large proportion of its subscriber base—viewed its thriller Birdbox, starring Sandra Bullock.

Netflix’s launched Murder Mystery, which stars Adam Sandler and Jennifer Aniston, last month. In a letter to shareholders, the company said that 73 million households watched the movie in the first four weeks. In the letter to shareholders, the company also announced viewership metrics for other original content.

Netflix announced that When They See Us has been nominated for 16 Emmy awards. Netflix’s Emmy awards show the quality of content on its platform. Netflix was nominated for 117 Emmy awards—its highest number ever.

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Netflix saw cash flow of $594 million in the second quarter

The video streaming giant has been spending a lot of capital mainly to create original content and acquire content. The push is intensifying to ward off new competitors like Apple and Disney.

Netflix’s free cash flow was -$594 million in the second quarter. The free cash flow was slightly worse than -$559 million in the second quarter of 2018. The company’s free cash flow was -$3.01 billion last year compared to -$2.0 billion in 2017.

In the letter to shareholders, Netflix cautioned that its free cash flow in 2019 could be as high as -$3.5 billion. However, the company expects its free cash flow position to start improving in 2020, which is consistent with the last forecast. Netflix expects to benefit from its increasing subscriber base, revenue, and margins.

The company has been spending over $8 billion annually on content over the last few years. According to Variety, Netflix might spend up to $15 billion on content this year.

Netflix’s aggressive spending on content had a negative impact on its free cash flow. However, aggressive spending might be necessary to provide Netflix with enough quality content to keep its churn rate low. The company needs to compete with upcoming competitors, especially in the US.

Netflix has a mountain of debt. The company’s long-term debt is $12.6 billion. Netflix also owes billions of dollars in off-balance-sheet debt. The company’s increasing debt has concerned investors.

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