After two straight quarters of disappointing Wall Street, Netflix has lowered expectations for the third quarter of 2016 — with a forecast reflecting the ongoing effects of its shifting older U.S. subscribers to its standard $9.99 per month streaming plan.
In announcing Q2 earnings, Netflix projected net adds of 300,000 in the U.S. and 2.3 million internationally. That was “below even the most bearish forecasts,” analyst Michael Nathanson wrote in a research note Friday. And it’s well off third-quarter 2015 results, when Netflix netted 880,000 domestic streaming subs and 3.62 million overseas.
But the company, which reports Q3 earnings Oct. 17 after market close, may not be out of the woods on its transition of Netflix customers from sub-$10 plans for the two-stream HD service.
In a research note this week, Cowen & Co. analyst John Blackledge cut Netflix U.S. subscriber estimates for Q3 to 130,000 (down from 300,000 previously) based on the firm’s research indicating that the “pricing increases are likely impacting U.S. sub growth more than we originally expected.” His international forecast of 2 million net adds remained unchanged.
Per Cowen’s proprietary survey, 22% of Netflix’s U.S. streaming subs were paying $8.99 month as of September 2016. That indicates pricing increases in Q4 will likely hurt net sub adds, although that could be offset by Comcast’s Xfinity X1 launch of Netflix on the set-tops around Thanksgiving, Blackledge wrote. Based on the survey data, the analyst reduced forecasts for Q4 from 1 million to 776,000 U.S. net paid sub adds.
While the pricing increases will likely result in “short-term growing pains” through the end of 2016, ultimately that will lead to meaningfully higher revenue per subscriber beginning in 2017 and as a result, “a positive catalyst for ’17 revenue and margin profile,” Blackledge wrote. By next year, customers will have gone through “an ‘aha moment’ and made the decision to remain a sub either at the $9.99 price point or elected to other monthly pricing options,” so monthly churn will be likely be lower.
Nathanson is more bullish, projecting 460,000 U.S. net streaming adds and 2.1 million overseas for the quarter ended Sept. 30. But, he added, “We believe the primary risk around the stock remains how the U.S. price increase will manifest in churn rates.”
RBC Capital Markets analyst Mark Mahaney, meanwhile, is anticipating 300,000 net new U.S. streaming subs and 2 million net new international streaming subs. He sees positive indicators in the U.S.: RBC’s most recent quarterly survey of about 1,000 U.S. consumers, conducted in August, found a record-high 42% of respondents use Netflix, up from 30% in August 2015. That’s compared with 54% for YouTube and 26% for Amazon.
Specifically asked how likely to they are to cancel in the next three months with the pending price increase, 10% said “very” or “extremely likely,” down from 12% in May, per RBC’s August survey. Mahaney, who published an analysis last month finding Netflix has very low monetization per hour viewed on its service relatively to major TV conglomerates, also cited positive early reviews for “The Crown,” Netflix’s pricey original about the British royal family set to debut Nov. 4.
“Netflix is getting stronger in the U.S.,” Mahaney concluded.
On the financial front, Wall Street analysts expect Netflix to post revenue of $2.28 billion and earnings per share of 6 cents, compared with $1.74 billion in revenue and EPS of 7 cents for Q3 2015.
While Netflix’s legendarily volatile stock often swings based on the market’s perception of its quarterly performance — as well as by rumors like the recent chatter that Disney or Apple may be interested in acquiring the streamer — it’s important to remember that Netflix is running a marathon, not a sprint.
Many investors may be focused on Netflix’s quarterly performance, but the company takes a longer view of its business, said Paul Verna, analyst with market research firm eMarketer.
“Over the past year (Netflix) has concentrated on international expansion, making licensing deals with pay TV providers and building on its library of premium original content,” he said. “These are long-term projects that are likely to continue well into 2017 regardless of how Netflix performed in Q3 2016 vis-à-vis Wall Street expectations.”