Netflix misses forecasts, shares tumble

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 18 Jul 2019

US-based streaming service Netflix missed its forecasts across all regions and lost US customers for the first time in eight years.

In a letter to shareholders, the streaming giant says: “Our missed forecast was across all regions, but slightly more so in regions with price increases.”

The streaming giant had forecast a gain of 300 000 subscribers during the second quarter – April to June – but instead it lost about 130 000 customers in the US market.

According to Reuters, Netflix shares sank nearly 12% in after-hours trading after the company posted quarterly results that showed it shed 130 000 US customers.

It adds that Netflix reported it added 2.83 million paid streaming subscribers outside the US, below analyst expectations of 4.8 million, according to IBES data from Refinitiv. Analysts had forecast a US gain of 352 000.

Local market

Netflix entered the South African market in January 2016. Although the company says it does not disclose subscriber numbers by region, it recently told ITWeb that 40% of South African Netflix members enjoy romantic comedies.

According to the company, some of the most watched shows in SA include Isn’t It Romantic, The Princess Switch, Set It Up, Kissing Booth and When We First Met.

“We have seen a keen interest in local content, especially following the launch of Shadow earlier this year as well as the announcement of two local Originals – Queen Sono and Blood & Water, both of which will land in 2020.

“The excitement surrounding these shows has proven that there is an appetite for local, quality content that has the ability to resonate with consumers both locally and globally.”

In SA, Netflix competes against the likes of MultiChoice’s Showmax among other over-the-top services providers.

In its letter to shareholders, Netflix continues: “We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region).

“Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated. While our US paid membership was essentially flat in Q2, we expect it to return to more typical growth in Q3, and are seeing that in these early weeks of Q3.

“We forecast Q3 global paid net adds of seven million, up versus 6.1 million in Q318, with 0.8 million in the US and 6.2 million internationally. Our internal forecast still currently calls for annual global paid net adds to be up year-over-year. There’s no change to our 13% operating margin target for FY19, up 300 basis points year-over-year.”

Fierce competition

On competition, the streaming giant says over the next 12 months, Disney, Apple, WarnerMedia, NBCU and others are joining Hulu, Amazon, BBC, Hotstar, YouTube, Netflix, and many others in offering streaming entertainment.

It points out that the competition for winning consumers’ relaxation time is fierce for all companies and great for consumers.

The innovation of streaming services is also drawing consumers to shift more and more from linear television to streaming entertainment, it notes.

“If you watch Our Planet on a new TV with Dolby Vision or HDR10, you will see why: the quality of streaming television is spectacular. In the US, our most developed market, we still only earn about 10% of consumers’ television time, and less of their mobile screen time, so we have much room for growth.

“We, like HBO, are advertising free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”

However, the company says revenue growth accelerated 400 basis points to 26%, and operating income increased 53% year-over-year in Q2.

It notes that paid membership grew by 2.7 million, less than the 5.5 million in Q2 a year ago and Netflix’s five million forecast.

“In Q3, we expect to grow by seven million paid memberships, more than the 6.1 million in Q3 a year ago. Consumers around the world continue to move from linear television to Internet entertainment at a remarkable rate.”

It says Q2 results and Q3 forecast average streaming paid memberships increased 24% year-over-year, while average revenue per user increased 3% year-over-year on a reported basis.