Netflix Q2 Sub Growth Stalls; Posts First Domestic Sub Loss

In a surprise, Netflix July 17 disclosed it added just 2.7 million subscribers in the second quarter, ended June 30. The sub growth was barely half the 5 million subscribers added in the previous-year period.

In the shareholder letter, CEO Reed Hastings said the service expects to grow its sub base by 7 million paid memberships in the current third quarter, more than the 6.1 million additions in Q3 a year ago.

But that can’t mask the fact Netflix lost 126,000 net domestic subs in Q2 after forecasting a gain of 300,000. It was the first domestic quarterly sub loss for the SVOD behemoth. International paid sub growth topped 2.8 million, down significantly from market projections around 4.7 million.

To jumpstart sub growth in India, Netflix is rolling out a lower-priced mobile-screen plan to complement existing plans in the region.

“We believe this plan, which will launch in Q3, will be an effective way to introduce a larger number of people in India to Netflix and to further expand our business in a market where pay-tv [average revenue per user] is low [below $5],” Hasting wrote. “We will continue to learn more after launch of this plan.”

The subscription streaming pioneer ended the period with 151.5 million global subscribers compared to 124.3 million during the previous period.

In the United States, the sub count stood at 60.1 million, down from 60.23 million in Q1, but up from nearly 56 million a year ago.

Internationally, subscribers tallied almost 91.5 million compared to 68.4 million last year and 88.6 million in Q1.

Netflix’s legacy by-mail disc rental service ended the quarter with more than 2.4 million subs, compared to 2.9 million last year. The packaged media segment continues to be profitable, generating more than $45.8 million in contribution profit on revenue of $76.2 million.

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Hastings said the missed sub growth was across all markets, but “slightly more” in regions where management initiated price increases.

“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),” Hasting wrote.

The Netflix co-founder attributed the growth miss to the quarter’s content slate and outsized sub growth in the first quarter.

“There may have been more pull-forward effect than we realized,” he wrote. “In prior quarters with over-forecasts, we’ve found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well.”

Wall Street might think otherwise. Netflix shares have plummeted more than 12% in after-market trading.

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