Netflix (NASDAQ:NFLX) announced on Wednesday that it will stream the entire Friends sitcom series come 2015. That's a good thing, since it's going to need Friends after disappointing investors with its third-quarter report.
Shares of the leading premium video service fell sharply in after-hours trading on Wednesday, and it's easy to see the root of Wall Street's disappointment: subscribers.
Netlfix closed out the quarter with 53.06 million streaming subscribers worldwide. That's a big number. The company also added a little more than 3 million net new accounts over the past three months. It probably padded its lead once again in a market that it truly dominates. However, three months ago, Netflix was forecasting 53.74 million total streaming subscribers for the quarter. For a company that historically dishes out conservative guidance, coming up short of its own prediction is a pretty big deal. The miss was global, as streaming additions fell short of Netflix's domestic and international projections alike.
Netflix thinks May's pricing increase played a part in the shortfall. The decision to increase its monthly rate for new streaming accounts from $7.99 to $8.99 was a factor. It just wasn't obvious right away because of the favorable tailwind the company initially had with one of its biggest original shows.
"In hindsight," the company stated, "we believe that late Q2 and early Q3, the impact of higher prices appeared to be offset for about two months by the large positive reception to Season Two of Orange Is the New Black."
Netflix is still satisfied with the springtime increase. The company has factored it into a forecast that calls for 4 million net additions during the current quarter.
Into the numbers
Revenue climbed 27% to $1.409 billion, fueled by a 33% spike in paid streaming members over the past year that was offset by the perpetual slide in the legacy DVD-rentals business. Wall Street was holding out for slightly more than that figure.
The year-over-year margin improvement was substantial, resulting in a 93% surge in operating profit and an 86% pop in net income. Netflix posted a profit of $0.96 a share, surpassing the $0.93 analyst target and Netflix's own $0.89 forecast, but fans cheering on the bottom-line beat appear to be no match for the boo birds concerned about the disappointing subscriber tally.
There were plenty of positives in the report beyond the better-than-expected bottom-line showing. Netflix claims that per-member viewing and retention in the U.S. are at record levels. Its international deficit increased sequentially, but that's the handiwork of its recent push into Europe. In fact, Netflix points out that its overall international operations were profitable if you back out the new territories it entered over the past year.
Netflix is also targeting 4 million net streaming subscriber additions during the final quarter, to close out the year with more than 57 million Web-based video buffs. That's a lot of friends for a company that has just secured the rights to all 10 seasons of Friends. Unfortunately for shareholders, it was holding out for a million friends more.