Netflix beats first-quarter earnings estimates, but slowdown in subscribers hits stock after hours

April 17, 2017 7:55 PM PT

Netflix Inc. is expected to cross 100 million subscribers worldwide in the days ahead, a symbolic threshold that marks its continued dominance of the global streaming media market.

But the seemingly invincible Netflix also faces hurdles. That was underscored Monday when first-quarter results showed weaker-than-expected subscriber growth and a high rate of cash burn as the company ramps up original content production in a bid to fend of competitors.

The Los Gatos, Calif.-based company beat earnings estimates for the first quarter, but shares of the streaming media company took a temporary hit in after-hours trading Monday after it reported weaker-than-expected new subscriptions for the period.

The slowdown came despite the release of popular new titles, including the superhero-themed “Marvel’s Iron Fist” and the kid-oriented “A Series of Unfortunate Events.” New stand-up specials from comedians Dave Chappelle and Amy Schumer also debuted during the period.

Beating Wall Street estimates

Netflix reported earnings of 40 cents a share in the first quarter, beating Wall Street’s estimates. Revenue came in at $2.64 billion, which was in line with expectations.

Analysts predicted Netflix would earn 37 cents a share, up from 6 cents a share in the same quarter last year. First-quarter revenue was projected to increase 35% to $2.64 billion from a year earlier.

Netflix shares have been trading at near record levels. However, investors have been closely watching for signs of a slowdown in growth as the company reaches nearly 100 million subscribers.

Drew Barrymore is a Southern California housewife turned undead flesh-eater in the Netflix comedy "Santa Clarita Diet." (Saeed Adyani / Netflix)

Slowdown in subscriber growth

Netflix reported net subscription additions of 4.95 million for the quarter, falling shy of its guidance. The company had forecast an addition of 5.2 million new subscribers from January through March, compared with 6.74 million added during those three months last year.

Domestically, Netflix added 1.42 million subscribers in the first quarter, missing its 1.5 million forecast. Netflix posted an addition of 3.53 million subscribers overseas, versus its forecast of 3.7 million.

Executives downplayed the subscriber miss in an earnings call Monday. “We're still on a great growth path,” said David Wells, the company’s chief financial officer. On a quarterly basis, “you'll see some fluctuation.”

Other new titles to debut in the quarter included “Santa Clarita Diet” and the reality series “Ultimate Beastmaster.” The last day of the quarter saw the debut of the millennial-focused dramatic series “13 Reasons Why.”

Netflix reported negative free cash flow for the quarter of $423 million and said it expects to have $2 billion in negative cash flow for 2017.

The high spending rate is at least partially attributable to Netflix’s commitment to creating its own series and movies. Overall, the company has said it plans to spend $6 billion in original content during the year, up from $5 billion last year.

“They're investing in premium content and it's starting to pay off. All they can do is attract subscribers by having content that people want to see," said Anders Bylund, an analyst at the Motley Fool, who covers Netflix. “It's early days and it's still a high cost for them…. They're spending money now to make money later, or that's the plan."

Netflix continues to face competition from Amazon, whose Prime Video service is also ramping up original content production. But Netflix CEO Reed Hastings said Monday that he doesn’t see them as competitors.

“We're like two drops in the ocean,” he said during the earnings call. “Home entertainment is not a zero sum game.”

Netflix has agreed to lease all 92,000 square feet of a five-story office building under construction at Sunset Bronson Studios in Hollywood. (Hudson Pacific Properties Inc.)

Shares swing in after-hours trading

Shares dropped by as much as 3% in after-hours trading as investors reacted to news that Netflix's subscriber growth has slowed, only to rebound later.

The dramatic swing demonstrates how sensitive Netflix stock has become to even the slightest miss and despite strong earnings.

Shares had closed Monday at $147.24, up 3%. Shares have been up nearly 20% this year and reached a record March 30, when they climbed to $148.

Netflix, which has been rapidly expanding globally as its business in the U.S. slows, predicted that profit will drop in the second quarter — including a $28-million loss in the international division — as it spends more on original series and movies.

The company will unveil next quarter the newest seasons of two of its most acclaimed and enduring series: “House of Cards” and “Orange Is the New Black.”