What: Shares of Netflix (NASDAQ:NFLX) fell as much as 10.1% early Thursday after the streaming media specialist reported weaker-than-expected third-quarter results.
So what: Quarterly revenue rose 23.3% year over year to $1.74 billion, and translated to a 50% decline in net income to $29.4 million, or $0.07 per share. Analysts, on average, were predicting slightly better results on both counts: Consensus estimates called for revenue of $1.75 billion, and earnings of $0.08 per share.
Driving top-line growth was Netflix's addition of 3.62 million subscribers during the quarter, exceeding its own forecast for 3.55 million and leaving it with 69.17 million members at the end of the quarter. On one hand, Netflix's forecast turned out to be too high for its core U.S. segment, where it added 0.88 million new members and fell significantly below guidance for 1.15 million. For that, Netflix blamed higher-than-expected "involuntary churn," driven partly by consumers' transition to chip-based credit and debit cards.
On the other hand, Netflix under-estimated growth in international markets, where it added an impressive 2.74 million subscribers, significantly exceeded guidance for 2.4 million, and marked an acceleration from 2.04 million added this time last year.
Now what: For the current quarter, Netflix expects to add 1.65 million members in the U.S. (down from 1.98 million in the year-ago quarter), and 3.5 million international members (continuing its overseas acceleration from 2.43 million the year earlier).
That said, as Netflix invests to grow its international presence and launch in new markets -- including Spain, Italy, and Portugal later this month -- Netflix anticipates its losses from the overseas streaming segment to grow to around $117 million in Q4. Consequentially -- and given slower growth in the already profitable U.S. market -- Netflix expects fourth-quarter net income of just $0.02 per share. By contrast, analysts were modelings Q4 earnings of $0.04 per share.
Over the longer term, however, it's worth noting that if widespread debit and credit card transitions are to blame, the aforementioned "involuntary churn" in the U.S. should correct itself as consumers who would have otherwise re-upped realize their Netflix accounts have lapsed. What's more, Netflix maintained its expectation to "run around break-even" in international markets through 2016, "and to deliver material profits thereafter."
So while the market may be fretting over challenges facing Netflix right now, it seems these challenges are only near-term in nature. In the end, that's why I think today's pullback should prove little more than a blip on the radar for patient, long-term investors.