Netflix makes case for its price moves, but cuts Q3 outlook

Netflix makes case for its price moves, but cuts Q3 outlook

Summary: Netflix is planning on a third quarter hit over its pricing changes, but expects to rebound in the fourth quarter. The company also expects to spend more on content.

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TOPICS: Banking
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Netflix defended its decision to raise prices on DVD and streaming movie bundles, but does anticipate some impact to the third quarter as it delivered a weaker-than-expected outlook.

Netflix reported second quarter earnings of $68.21 million, or $1.26 a share, on revenue of $788.6 million. Wall Street was looking for earnings of $1.11 a share on revenue of $791.5 million. The three months ended June 30 reflect a quarter that ended before Netflix changed its pricing model. Neflix ended the second quarter with 25.56 million subscribers.

But all eyes were on the company's outlook with the price change. Netflix decoupled its DVD by mail and streaming media plans. One DVD out and streaming movies is now $15.98. Netflix said in a shareholder letter:

Some subscribers will cancel Netflix or downgrade their Netflix plans. We expect most to stay with us because each of our $7.99 plans is an incredible value. We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we’re working hard to further improve the quality and range of our streaming content in Q4 and beyond.

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.

Speaking during the company's quarterly conference call for investors on Monday, CEO Reed Hastings maintained an optimistic front:

The price change takes effect upon each subscriber's renewal in September. So we don't have a full range view of it. But so far, from what we've seen, we've been very pleased at the effects and we're feeling great about the decision. As tough as it is. And it's going to allow us to have just fantastic streaming content going forward.

The fact that some folks will leave Netflix or downgrade will hit the company's financials. Here's the overview:

Overall, Netflix is projecting $799.5 million to $828.5 million in third quarter revenue with earnings between 72 cents a share to $1.07 a share. The problem: Wall Street was looking for earnings of $1.09 a share on revenue of $846.5 million.

It's also worth noting that Netflix's wide earnings range reflects continued investment, international expansion and the fact that the company doesn't know how its pricing will affect its customer base. Netflix projected U.S. subscribers of 24.6 million to 25.4 million with streaming customers being 21.6 million to 23.3 million of that sum. DVD subscriptions will be 14.6 million to 15.7 million.

On the international front, Netflix is expecting 1.15 million subscribers to 1.45 million subscribers.

Netflix's bet is that it can weather the storm in the third quarter and then resume growth in the fourth quarter. The company said:

In Q4, we expect domestic net additions to return to a pattern of year-over-year growth while revenue will reflect a full quarter’s impact of the pricing changes, which could result in Q4 being our first billion dollar global revenue quarter, driven by strong U.S. performance.

However, it's unclear this third quarter slump and fourth quarter rebound will play out. The economics from Netflix in the second quarter illustrated a few trouble spots.

  • The company's domestic churn rate was 4.2 percent in the third quarter, up from 3.9 percent in the first quarter. Netflix's churn rate is in line with the historical norm, but came in at the highest level since the third quarter of 2009.
  • Netflix spent $15.09 to acquire a customer who delivered an average of $11.49 in revenue each month.
  • The company expects revenue to increase in the fourth quarter, but it is targeting a 14 percent domestic operating margin because it will spend more on content.

Related: Netflix's pricing backlash: Follow the money, churn rates

CNET: Don't call Netflix's CEO 'Greed' Hastings just yet

Topic: Banking

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11 comments
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  • RE: Netflix makes case for its price moves, but cuts Q3 outlook

    It may be a good service is the US but here in Canada it needs to improve greatly before I ever sign up, just the streaming is available in Canada which is fine but wow they really need to step it up, there is a whole lot of nothing to watch, I checked out the Menu to see if I wanted to get Netflex and it has nothing really to offer to me that I would care to watch. Newer content would help, but I do understand their hands are tied my the movie industry so unless this changes i can't see getting the service unless its free.
    nascar13@...
  • Already cut my service from dvd online to online only. $7 dollars less a

    month from my wallet to netlfix. Way to go guys!!! I was a happy 10+ year subscriber. Monkey around with it again or keep letting your online catalog languish and I have no problem dumping you altogether...
    Johnny Vegas
    • I feel the same way

      @Johnny Vegas
      I always had the 7.99 streaming only, and I did notice that I'm getting some choices now that I didn't have before, but if the streaming stays where it's at (doesn't get more titles I'm interested in) then I'm gone too.
      William Pharaoh
    • RE: Netflix makes case for its price moves, but cuts Q3 outlook

      @Johnny Vegas Amen! I was a non-Netflix customer who was considering opening an account because it included streaming at a reasonable price. After I saw their new pricing model, I said forget it. I'll just buy the movies I really want and watch the rest on cable. At this point, I plan to forget about Netflix completely.
      BillDem
  • Netflix "Offering Great Value" ???????

    Not on their streaming service, it stinks...I went through anything I wanted to watch from the streaming catalog within two to three months, then it became a chore to find any movies that weren't on the cable networks on the weekends. I suspect they'll have to spend a lot to improve the streaming catalog, which in turn means they'll probably have to jack up their prices again...even if they're able to ditch the DVD end.

    I had the 10.99 DVD-Streaming plan, which I was OK with, even with the lackluster streaming, but 15.99...cancelled the service the day of the price hike. Voting with your dollars is the only way these greedy companies are going to get the message.
    bobert1@...
    • RE: Netflix makes case for its price moves, but cuts Q3 outlook

      @bobert1@... LOL, yeah right dump Netflix and sign up for $80/month Comcast. Real smart there chump.
      MSFTWorshipper
      • Ahh. Someone who doesn't get the real world.

        @MSFTWorshipper
        Wake up. The Sun is shining.

        Netflix is not cable TV. Its not even close to pretending to be.

        The world is cram-pack-jammed with people who cannot get by with all their daily input coming entirely from Netflix. A vast number of people who get Netflix also have cable or satellite TV. It really helps if you like televised news, or perhaps sports.

        The simple point is that many people are already getting some form of paid television and they have the money and they have sought out additional entertainment. Netflix sounded good for the price.

        Its just not panning out that way for many. If you have the $80 for Comcast and Netflix isn't cutting the mustard, well, you do the math.
        Cayble
  • RE: Netflix makes case for its price moves, but cuts Q3 outlook

    How else are they gonna pay for all the Greedy studio costs? Movies will all be streaming before we all know it. They're grabbing for everything they can get their greedy hands on. Oh yeah! All for Wall Street... maybe they're helping to pay off the Banker Rip Off of the Century. Can anyone say Derivatives ???
    rick@...
  • *****NETFLIX SUCKS BIG TIME!!!!!!*****

    Netflix has been planning to upgrade their streaming choices for the last three years, all they need is more money. That's a broken record you get tired of listening to, as they constantly raise their rates behind your back and now right to your face!<br><br>Netflix is passe...old movies, throttled returns, an arrogant CEO and a very dim outlook. They will go the way of Blockbuster and not soon enough for me. I prefer Amazon and Vudu.com. At least I can watch what I want when I want, on movies that are current and interesting. I will never reactivate my Netflix account. What for? Takes you forever to receive movies and their streaming content is a freaking joke.
    orandy
  • Choices...

    The streaming was nice, but the selection is still very poor on streaming. Mostly B stuff at best with the occasional mainline title and a lot of indie movies. Their streaming service also can't do full HD so everything looks low quality on my tv. Their streaming service has never felt like it was enough to justify a monthly bill in and of itself.

    So now I am left with choices. Keep the nice-to-have streaming? Or just the dvd line that I often forget to use? Ditch DVD but keep streaming with its poor selection? For the full price of both I can just drop the service entirely and rent 5 movies off of other streaming services in full HD with better selections.

    Weirdly, I don't think I would have even blinked if they just raised rates. Inflation. I get it.

    But the split model is creating choices that, illogical as it may be, I simply don't like and my finger keeps wandering over to the cancel button. One of those "tyranny of choice" psych things probably.
    SlithyTove
  • RE: Netflix makes case for its price moves, but cuts Q3 outlook

    I dumped a $70/mo satellite TV service because I only watched the news and movies. I now get the news off the web, and all the movies I want using both flavors of Netflix. Seems like a bargain to me. Unlike most who've posted above, I have no problem at all with the price, and I'm getting great service.
    FeralUrchin