Netflix Inc. posted second-quarter subscriber gains that missed forecasts, rattling investors who bid the stock up almost threefold this year on expectations original shows would fuel faster growth.
Netflix, Inc. (NASDAQ:NFLX) added 630,000 subscribers in the U.S. during the second quarter, the company announced yesterday. That’s in the range of the guidance the company provided three months ago, but it may disappoint investors who were hoping that new shows like “Arrested Development” could bring in something closer to 900,000 new customers.
CEO offered a frank assessment of the risk to investors
Chief Executive Officer Reed Hastings offered a frank assessment of the risk to investors as Netflix, Inc. (NASDAQ:NFLX), based in Los Gatos, California, races to become the leading global provider of Internet TV. A price-earnings ratio of more than 245, among the highest in the S&P 500, leaves little room for error as Hastings channels resources into non-U.S. markets.
“We are choosing a strategy which has us put essentially all of our domestic profit into international expansion,” Hastings said on a first-ever video investor call. “It definitely takes a strong stomach on the part of investors.”
Netflix’s new strategy to attract viewers
“We’re continuing to expand originals because they’re working for us, they’re working for our members,” Hastings said. He also suggested Netflix, Inc. (NASDAQ:NFLX) would own content in the future, similar to Time Warner Inc (NYSE:TWX)’s HBO.
Original shows such as “Arrested Development” and the Emmy-nominated “House of Cards” are a crucial component of the company’s efforts to attract viewers before must-have studio content becomes available, said Michael Olson, an analyst at Piper Jaffray Cos. in Minneapolis.
The company is spending about 5 percent of its $2 billion annual content budget on original shows, bolstering its library of films and TV reruns before obtaining exclusive theatrical content from The Walt Disney Company (NYSE:DIS) and Dreamworks Animation Skg Inc (NASDAQ:DWA)
“They’re trying to walk a fine line with originals,” Olson said. “It’s important for buzz around the service but not the main driver apparently for their growth numbers.”
Later this month, Netflix, Inc. (NASDAQ:NFLX) will premiere “Mako Mermaids,” a teen series. The company plans to expand its originals strategy into documentaries and stand-up comedy, Hastings said in an interview.
Netflix disappointing number of U.S. signups casts
The disappointing number of U.S. signups casts doubt on Hastings’s so-called “virtuous cycle” in which subscriber additions fund ever-increasing program spending, in turn attracting even more users, said Paul Sweeney, Bloomberg Industries’ media analyst.
“If sub growth slows or worse, this virtuous cycle can become more of a vicious cycle,” Sweeney said.
Netflix Q3 forecast
Second-quarter net income rose almost five fold to $29.5 million, or 49 cents share, from $6.16 million, or 11 cents, a year earlier. Analysts had forecast 40 cents, the average of 25 estimates.
Sales increased 20 percent to $1.07 billion, matching estimates, from $889.2 million a year ago. Netflix, Inc. (NASDAQ:NFLX) charges $7.99 a month for its Web service.
Net income this quarter will be $18 million to $34 million, or 30 cents to 56 cents a share, the company said. Analysts predict profit of 43 cents on revenue of $1.1 billion.
Netflix, Inc. (NASDAQ:NFLX) forecasts 690,000 to 1.49 million new domestic streaming customers in the current third quarter, according to the statement. Analysts, on average, project 1.1 million. The company expects sales of $693 million to $701 million and profit of $161 million to $171 million for the domestic Web business.
For its international streaming business, Netflix, Inc. (NASDAQ:NFLX) forecasts revenue of $170 million to $184 million, and a loss of $70 million to $86 million, according to the statement.