Netflix U.S. Subscribers and Overseas Expansions Stunt Growth
Online streaming services provider Netflix reported lower profits for the third quarter, as fewer U.S. subscribers and higher costs of overseas expansion weighed on its growth.
Netflix’s net income for the third quarter dropped more than half to $29.4 million, or 7 cents a share, from $59.3 million, or 14 cents, in the same period last year, missing analysts’ estimates by 8 cents.
In a letter to shareholder, the company said new subscribers in the U.S. have declined to 880,000 from 980,000 in the third quarter of 2014. Netflix attributed the 10 percent drop to what it called an “involuntary churn,” caused by customers forgetting to update their payment method after their banks adopted chip-based cards.
“It’s likely multi-factored… but certainly the transition to the chip cards is not helping and that has to be a factor,” Chief Financial Officer David Wells said in an earnings interview Wednesday.
Netflix, which is seeing a growing global membership, is in a bid to roll out original content that would appeal to an international audience amid cutthroat competition and fluctuating distribution strategies.
Global subscribers came in higher than expected at 69 million, which grew 3.62 million from the prior year’s quarter, according to the letter. However, the loss from international operations more than doubled to $68 million.
While Netflix is betting the market will be dominated by on-demand internet TV in the next decade, Netflix executives said media companies have to become more cautious with licensing content.
“The future of how networks and studios deal with Netflix, Hulu and other providers is certainly going to determine their future,” Chief Executive Officer Reed Hastings said in the interview, which was posted on YouTube shortly after the earnings release.
Ted Sarandos, who oversees content and production at Netflix, cited the company’s decision not to renew its pact with Epix amid a growing investment in its original programming. Epix, which carries titles such as Hunger Games and World War Z, turned to Amazon’s Prime Instant Video and Hulu after parting ways with Netflix.
“When we said we’re going to do a non-exclusive deal with Epics, that would put the content on Netflix several months after paid TV and completely non exclusive,” Sarandos said. “It wasn’t a very strategic investment.”
Netflix is accelerating its ambitious agenda through original shows such as “Orange is the New Black” and “Narcos.” On Friday, the company will debut “Beast of No Nation,” its first film and an Oscar hopeful.
As a result of higher cash paid upfront and investment in original shows, free cash flow dropped 10 percent to $252 million this quarter. To offset that cost, Netflix bumped up pricing for the second time in 15 months.
Effective this month, new customers have to pay a dollar more at $9.99 per month for its standard plan, which allows streaming on two screens concurrently. Existing customers have to eventually pay the higher subscription in October next year.
In the interview, Hastings declined to state if the pricing model would stay put in the coming two to five years. Instead, he highlighted that the company is on track to burn $1 billion this year and is likely to raise funds from the market next year.
Netflix is breaking into Spain, Italy and Portugal in the forth quarter and will expand to East Asian markets, including Hong Kong and Singapore. The company expects to break even through 2016 and deliver profits after that.
Company shares shed 8.3 percent to close at $101.09 on Oct. 15. The stock rose 57.7 percent in the past year, outpacing a 14.6 percent jump in the benchmark NASDAQ index.
