While NFLX moments ago reported Q2 EPS of $0.09 that beat expectations $0.03, the reasons the stock is plunging after hours is because it appears that Netflix growth story is officially over, and not just because the company guided far lower on international net additions, seeing only 2.00 million, 20% below Wall Street’s forecast of 2.54MM, but because as the Company itself admitted, “we are growing, but not as fast as we would like or have been. 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.”
It wasn’t just the abysmal international guidance: NFLX also reported that it expects a paltry 300,000 net US streaming additions in Q3, less than half of the street’s 695,000 forecast.
Some more details:
- NETFLIX 2Q INTL STREAMING NET ADDS 1.52M, EST. 2.15M
- NETFLIX SEES 3Q INTERNATIONAL STREAMING NET ADDS 2M, EST. 2.54M
- NETFLIX SEES 3Q DOMESTIC NET ADDS 0.30M, EST. 695K
- NETFLIX SEES 3Q EPS 5C, EST. 7C
It appears that unscalability of NFLX barriers to entry was a little exagerated:
As Internet TV rises in popularity, so do the SVOD offerings. In the US, for example, CBS All Access, Seeso, Amazon Prime Video, Hulu, YouTube Red, and many others are all growing. Our view, however, is that we are all growing primarily against linear TV hours and that competition did not contribute materially to our miss in Q2. First, increased competition would show up mostly in soft gross additions rather than churn. Second, we experienced a similar uptick in churn in early April in Canada, where there has been no recent increase in SVOD competition but where ungrandfathering is also underway.
This is how Reed Hastings justifies the ugly forecast:
Our global member forecast for Q2 was 2.5m and we came in at 1.7m. Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to ungrandfather longer tenured members and remained elevated through the quarter. We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering. Churn of members who were actually ungrandfathered is modest and conforms to our expectations. 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.
Our global membership forecast for Q3 includes an impact from the spectacle of the Olympics, on par with what we experienced four years ago, and does not include any boost in the US from the Comcast X1 launch due to uncertainty on timing as we and Comcast will only release Netflix on the X1 when the viewer experience is great.
For Q3, we forecast US net adds of 0.3 million as ungrandfathering continues. We expect US contribution margin to improve year over year in both Q3 and Q4 and we anticipate meeting our 40% US contribution margin target by 2020, or even earlier.
International net additions in Q2 came to 1.5 million compared to our 2.0 million forecast. Ungrandfathering occurred in Canada, UK/Ireland, Latin America, and the Nordics during Q2 where, like the US, we saw a similar, earlierthanexpected impact on retention. In our newer markets, we continue to learn and believe that growth will unfold over a multiyear period, similar to our
experience in Latin America.
International revenue rose 67% year over year. Excluding the impact of F/X ($ 37 million impact on a y/y basis), international ASP increased 8.7%. International contribution profit totaled $ 69 million as content spending was slightly lower than our forecast.
For Q3, we expect international net additions of 2.0m. Our approach in expanding our global footprint in January was to launch a service targeting early adopters and then to listen, learn and iterate quickly. Now that we are six months in, we will localize Netflix in Poland and Turkey with the addition of local language in the user interface, subtitles and dubbing. Localization in other markets will take place over time as economically prudent.
International contribution loss in Q3 is expected to be $ 95 million as improving profitability in our earlier foreign markets funds the investment in newer international territories. We remain confident in these investments because of our success in all of the markets launched prior to 2014 which are individually profitable on a contribution profit basis. These 20102013 launch markets are on track to deliver aggregate contribution profit of around $500 million in 2016.
This is what market saturation looks like: NFLX posted its first decline in internet traffic share in years.
So NFLX growth is slowing down. Is its cash burn? Nope.
“In Q2’16, free cash flow amounted to $ 254 million, compared with $ 261 million in Q1’16. We finished the quarter with cash and equivalents of $1.8 billion, while gross debt was unchanged at $2.4 billion. We still plan to raise additional capital through the high yield market later in 2016/early 2017.”
Our capital requirements continue to be driven by our investment in original content, particularly programming that we produce, which requires more cash upfront relative to licensed content. Original content provides Netflix with many benefits: new programming that debuts on Netflix, exclusivity, greater creative and business control, global rights and brand halo. These merits outweigh the timing of cash payments.
And visually, the company has burned more than $1 billion in the past year, with $254MM in Q2 cash burn compare to $229MM a year ago.
And then there is the great Chinese myth:
Unfortunately, this year the regulatory climate in China for our service has become more challenging. Disney’s streaming service, launched in conjunction with Alibaba, was closed down, as was Apple’s movie offering. We continue to explore options and, in the meantime, have plenty of work to do in our newly opened markets.
The sad summary that may well have closed the chapter on NFLX’s growth story:
Our global expansion is an exciting opportunity that will unfold over many years. Continued US growth will be a part of it and there is no change to our view that in the US Netflix can reach 6090 million members. We continue to expect to run around breakeven on a net income basis in 2016 and to generate material profits in 2017 and beyond. We will drive operating profit growth in 2017 by reducing our international losses and continuing to grow US profit.
The stock, predictably, is plunging 15%.
To 5-month lows…
More shortly.
The post Netflix Plummets As Growth Story Comes To A Halt: Company Says “We Are Not Growing As Fast As We Would Lke” appeared first on crude-oil.top.