On April 17, Netflix, Inc. (NFLX 9.72%) will report its Q1 earnings. Last quarter, the company predicted that it would add 5.2 million more users of its streaming service in Q1. If the company meets that target, it will have ended the quarter with 99 million streaming subscribers worldwide. The table below shows how Netflix has done over the past several quarters in adding streaming subscribers.
| Subscriber | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | Q1 2017 Forecast |
|---|---|---|---|---|---|
| Adds | 6.74 million | 1.68 million | 3.57 million | 7.05 million | 5.2 million |
| Total | 81.50 million | 83.18 million | 86.74 million | 93.80 million | 99.00 million |
Data source: Netflix. Chart by author.
The first quarter of 2016 benefited from Netflix's expansion to 130 new countries. The second quarter's weakness can partly be explained by price increases, and that is now firmly in the past. Combine that with Netflix's history of beating its own subscriber estimates and the fact that it will have 16 days of the second quarter under its belt when it reports, and I'm going to go out on a limb and predict that Netflix will announce 100 million total streaming subscribers when it reports.
Image source: Netflix.
The price increase is in the rearview mirror
Netflix should no longer be seeing a drag on membership from price increases that went into effect last year. Initially announced in 2015, the most popular plan for U.S. subscribers increased from $7.99/month to $9.99/month. All new subscribers paid the higher price upon joining the service beginning in 2015. Though existing subscribers were notified of the price increase in 2015, the actual increase took place on a rolling basis throughout 2016.
The U.S. price increase hurt Netflix's U.S. subscriber growth throughout 2016. For the second quarter, management reported that "churn ticked up slightly and unexpectedly" as more people than expected turned off their account and the company missed its guidance of adding 2.5 million subscribers in the quarter. The stock price dropped 13% the next day.
Netflix should not see a repeat performance this year and as a result I feel fairly confident the company will guide to at least a 2.5 million-subscriber increase for Q2 of this year at a minimum.
A track record of overdelivering
Looking back over the past two years, Netflix management has beaten its own guidance seven out of the past eight quarters. Below is a chart showing the guidance for each quarter, the actual results, and the difference between the two.
| Quarter | Guidance | Actual Results | Difference Between Guidance and Actual | % Difference From Guidance |
|---|---|---|---|---|
| Q1 2017 | 99.00 million | due April 17 | N/A | N/A |
| Q4 2016 | 91.94 million | 93.80 million | 1.86 million | 2.02% |
| Q3 2016 | 85.48 million | 86.74 million | 1.26 million | 1.47% |
| Q2 2016 | 84.00 million | 83.18 million | 0.82 million* | 0.98%* |
| Q1 2016 | 80.86 million | 81.50 million | 0.64 million | 0.79% |
| Q4 2015 | 74.32 million | 74.76 million | 0.44 million | 0.59% |
| Q3 2015 | 69.10 million | 69.17 million | 0.07 million | 0.10% |
| Q2 2015 | 64.77 million | 65.55 million | 0.78 million | 1.20% |
| Q1 2015 | 61.44 million | 62.27 million | 0.83 million | 1.35% |
*The only quarter in which the actual number was lower than the company's guidance. Percentages are rounded. Data source: Netflix. Chart by author.
Over the past eight quarters, Netflix has exceeded guidance by 0.82% on average. If the company exceeds its 99 million-subscriber guidance this quarter by 0.82%, it will record an additional 812,000 subscribers, for a total of 99.8 million subscribers by March 31, the last day of the quarter. Close to 100 million but not quite there.
The next quarter is already underway
Netflix's second quarter began on April 1 and consists of 91 days. Sixteen days of Q2 will have passed before Netflix reports results; that is 18% of the quarter. Although the second quarter is typically slow for Netflix new subscription ads, it would be quite a disappointment if the company forecast fewer than 1.68 million new subscribers for Q2, which would equal the weak showing of last year's Q2. With the price increase out of the way I would expect to see the company guide for at least 2.5 million new subscribers for this Q2, which is the guidance management gave last year.
If subscriptions come in smoothly over the quarter, one could expect that 18% of the Q2 additions would occur prior to April 17. If we take 18% of the 1.68 million new-subscriber number from last year's Q2, that would work out to 300,000 new Q2 subscribers by the time Netflix reports. If we add that to the 99.8 million guidance-beating estimate for Q1 in my last section, that would give the company more than 100 million subscribers.
If Netflix does not make a big subscriber announcement along with its earnings report, I would expect it to happen very soon thereafter.
