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Netflix shares drop as third quarter disappoints

Netflix missed its US target for new customer sign-ups and reported lower than expected operating income in its third quarter results, resulting in a significant share price drop.

Reed HastingsThe subscription video-on-demand service added 880,000 new US members in the quarter, compared to 980,000 in the prior year and a forecast of 1.15 million.

Netflix attributed the over-forecast to “slightly higher-than-expected involuntary churn”, which it said was down to the ongoing transition to chip-based credit and debit cards in the US. This has resulted in cards being re-issued – sometimes with different card or account numbers.

Netflix’s share price fell as low as US$94.55 on the news, though this had recovered to US$106.89 at press time today.

Globally, Netflix’s membership grew by 3.62 million to 69.17 million members, beating its forecast of 3.55 million. Netflix said that interms of global net additions, Q3 saw its most accurate projections to date.

In terms of financials, Netflix’s operating income was US$74 million, compared to US$110 million last year and a forecast of US$81 million. Net income almost halved year-on-year from US$59.2 million to US$29.4 million. Meanwhile, revenue climbed year-on-year from US$1.41 billion to US$1.75 billion but was shy of Reuters estimates of US$1.75 billion.

“As we have indicated previously, international contribution losses will grow sequentially in Q4 as we launch Spain, Italy and Portugal. We have announced our expansion to South Korea, Hong Kong, Taiwan and Singapore in early 2016. Our plan remains to run around break-even through 2016 and to deliver material profits thereafter,” said Netflix CEO Reed Hastings (pictured) and CFO David Wells in a letter to shareholders.

Netflix said it remained “on track to become global by the end of 2016” but said that the competitive landscape “remained vibrant” as other SVOD services continue to evolve and remain active bidders for content.

Speaking on the Netflix earnings call, chief content officer Ted Sarandos said: “The media business is absolutely in flux… You’ve had this growing move away from linear and towards on-demand, both watching and spending. So the future of how the networks and studios deal with Netflix, and Hulu, and Amazon Prime Instant Video, is certainly going to determine their future.”

On the content side, Sarrandos said: “We definitely are being more adventurous in terms of the genres that we’re going into,” citing the launch of Netflix’s first talk show, with Chelsea Handler, early next year. He added that the likelihood Netflix will compete directly with Vice in the next two years is “probably high”, suggesting the streaming service is planning on launching some kind of news service.

Commenting on the results, Paolo Pescatore, director of multiplay and media at CCS Insight said: “The key takeaway from Netflix’s latest financial results is its slower US subscriber growth. This is a result of the US competitive landscape intensifying and the arrival of new online video services such as Sling TV.

Pescatore claimed that these latest results “reinforce that its future growth lies in overseas expansion”, but said the main obstacles will be the amount of investment needed to secure rights for each country and how quickly Netflix can come profitable in each market.

“Regardless, we still believe that Netflix is a prime takeover target. All Web players are looking for a stronger presence in paid-for video, something Netflix has achieved with remarkable success – potential suitors include Apple, Alibaba and Google,” he added.

eMarketer media analyst Paul Verna said: “Netflix faces an increasingly fragmented and competitive market. Companies including Amazon, Hulu, Apple, Google and HBO are not only vying for viewing time and subscription dollars, they are also driving up the cost of content acquisition.

“Netflix plans to invest approximately US$5 billion in content next year, up from just over US$3 billion in 2015. These rising costs, coupled with ongoing international expansion, will continue to put pressure on Netflix’s profitability.”