Netflix Passes 25 Million Subs, Passes On Hulu — And Fails The Street

Netflix on TV in Living Room

Netflix (NSDQ: NFLX) passed 25.5 million subs, including 24.6 million in the U.S. and 970,000 in Canada, producing a $68 million profit on $789 million in revenue — but that wasn’t enough to meet revenue expectations. That plus the acknowledgment that the kind of rocketing growth in subscribers Netflix has enjoyed for the past year is probably behind it and that next quarter is likely to be negative hit the stock hard after hours: it plunged more than 10 percent to $252.66 during the two-hour gap between the release and the earnings call scheduled for 6 p.m. Eastern.

Netflix might have glided by the slight revenue miss (analysts expected $781 million non average) had it not been for negative guidance based on the results of the price increases and change in plans announced earlier this month, as well as the negative consumer reaction to those changes:

“In Q3 we will see only the negative impact of the pricing change, given that the announcement was early in the quarter and that the increases won’t take effect until late in the quarter (September 15th on average). We expect domestic net additions in Q3 to be lower than the previous year Q3, and because of the timing of the price change, revenues will only grow slightly on a sequential basis.”

Netflix also will have to the costs of expanding to Latin America in the third quarter. The notion that Q4 could be the company’s first $1 billion quarter is a little too far out to be of much help.

The cost of streaming:

All that content shopping comes with a price tag. The spend on streaming content more than tripled to $613 million for Q2 compared to $192 million in Q1. Streaming content liabilities also are up by $420 million as Netfix accounts for future payments.

Netfix added 1.8 million domestic subscribers last quarter– 75 percent more than it added in the second quarter last year — with roughly three out of every four subs opting for streaming only. At the same time, CEO Reed Hastings and CFO David Wells said in the quarterly shareholders’ letter, the number of hybrid subscriptions dropped slightly and DVD sales have “likely peaked.”

The two also confirmed that Netflix will not bid for streaming video competitor Hulu — and at the same time affirmed the Netflix strategy of staying away from current season TV:

“We are also mindful of Hulu Plus and Amazon (NSDQ: AMZN) Prime. Hulu Plus added about 325,000 subs in Q2; we added close to 2 million. We invest much more than Hulu Plus in content, in marketing, and in R&D.We aren’t planning to bid on Hulu because most of its revenue is from providing free ad-supported streaming of current season TV shows, which is not our focus.”

As for Amazon Prime as competition, “so far, we haven’t detected an impact on our business from Amazon Prime.”

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