After reporting lower-than-expected net streaming subscriber additions in Q2, Netflix (NASDAQ:NFLX) investors likely have some questions for management. After all, there was clearly a disconnect between what some investors were expecting and what actually happened; shares are down about 13% since the streaming-video giant's July 18 earnings release.
Fortunately, investors may be able to get some answers. In a conference call following the release, analysts were able to ask management some of the important questions that may have been on investors' minds. Here are some key takeaways from the call.
Underwhelming net adds: Just a "short-term phenomenon"
During Q2, Netflix added 1.52 million net international subscribers and 0.16 million net U.S. subscribers -- well below the company's guidance for 2 million and 0.5 million subscribers in those markets, respectively. It was a significant miss, to say the least. But Netflix CEO Reed Hastings insists this is only a temporary problem.
We've looked at everything and the fact that its coincident with that google trend data we included, [which showed significant press coverage of the price increase and may have sparked some subscribers to cancel their service,] really indicates that people don't like price increases. We know that. It's a necessary phase for us to get through, and then with the increased revenue we're continuing to invest in better and better content. So that's what makes us feel very strong and positive about the long term and that this is a short-term phenomenon.
Netflix has pricing power
Asked whether ungrandfathering members into higher pricing tiers has helped the company learn about any longer-term ramifications about pricing the platform globally, Hastings responded optimistically.
With new members we haven't seen any effect. We changed prices to our 8, 10, and 12 [dollar plans] last October and we've had a couple quarters of great growth on the gross add side. So I think this is really around change resistance. Whatever the price is for something, people don't like it to go up, but in terms of new members, which is most of what drives growth, the new pricing's working great.
In other words, management is saying customers appear very willing to pay a higher price for content over the long-term, evidenced by Netflix' ability to continue to gain new members even as it raises prices.
Netflix for "every American household"
Despite the slower net member additions in the U.S. recently, Hastings believes strong tailwinds will propel the service toward greater adoption in its local U.S. market over the long haul.
I mean smart TVs are continuing to sell, everyone's using internet video and internet television more and more. You see the rise of these virtual MVPDs, all of these things are building out the internet ecosystem, and I don't see why you know 10, 20 years from now why every American household isn't subscribing to Netflix, except for maybe competition -- so we've gotta stay on our toes on that basis.
Olympics could negatively affect subscriber growth
When asked about whether or not management was expecting the Olympics to impact Netflix, CFO David Wells said the company is expecting a small negative impact.
With an assumption of a hit from the Olympics, which largely affects us in the past on gross adds or on new subscribers coming in, you know that that's going to effect in terms of a year-over-year trend, we expect that to be a meaningful -- small but still meaningful -- impact on the quarter. Negative impact.
New Disney movies will boost "customer joy"
In 2012, Netflix signed a surprising deal with Walt Disney to become the become the exclusive US pay TV home of the latest films from Disney, including its powerhouse Marvel, Lucasfilm, and Pixar productions. The catch, however, was that Netflix would have to wait until September 2016 before it got access to new movies. With September around the corner, Netflix chief content officer Ted Sarandos noted he believes the new movies will bring value to members.
I think [those films] are very important for watching and distinguishing Netflix as a different destination for parents because we'll have all the Disney movies, all the Lucas movies, all the Pixar movies, which distinguishes us separately ... but the moves are about 10 months old so we don't expect them to drive a lot of new subscribers. But we do expect it to drive a lot of customer joy.
While Netflix' second-quarter may have highlighted disappointing subscriber metrics, management's question-and-answer session with analysts suggested the streaming-video giant is still seeing significant momentum in its business and that its subscriber growth headwind is likely a temporary problem. While investors, of course, should take this optimism with a grain of salt, management's commentary on the quarter does provide enough objective context to conclude there's no red flag.