Higher prices make Netflix customers cancel and stocks to dive
Netflix released its earnings report for the second quarter today. The company was one of 2015’s best performing stocks, but has seen its share price stumble in recent months on projections of slower growth. Today it reported $1.97 billion in revenue and net income of $41 million. Adding to worries about its growth, the company added just 1.54 million subscribers, well below its own projections of 2.5 million new customers. The stock is down around 14 percent in after-hours trading.
In its letter to investors, Netflix blamed the weak subscriber growth on churn, meaning older customers exiting. “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,” Netflix wrote. “We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering.”
The company stuck to its guns on the price hikes, writing that “while ungrandfathering and associated media coverage may moderate near term membership growth, we believe that ungrandfathering will provide us with more revenue to invest in our content to satisfy members, thus driving longterm growth.”
Netflix needs to increase revenues, because in recent years it has invested heavily in expansion and original content. These improvements have enticed subscribers to join the service; Netflix gained 13 million new subscribers in 2014, and another 17 million in 2015. In both years, Netflix saw new subscriptions spike in the fourth quarter, with the second quarter yielding the lowest number of new subscribers.
Today’s earnings report showed that the company may have seen the end of the explosive growth it generated in the run up to its expansion into 130 new countries. The company may soon have new upside in its domestic market, as it gains access to Comcast’s X1 box, and perhaps hubs for other cable providers in the near future, but so far, it’s not banking on these partnerships for new growth. In its investor letter, Netflix wrote it “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.”