Netflix Forecasts Slowing Subscriber Growth

Still Added More Than 2.2 Million New U.S. Subscribers

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Netflix CEO Reed Hastings at the 2016 Consumer Electronics Show in Las Vegas.
Netflix CEO Reed Hastings at the 2016 Consumer Electronics Show in Las Vegas. Credit: David Paul Morris/Bloomberg

Shares in Netflix, the world's largest paid online TV network, plunged after rattling investors with forecasts for weakening subscriber growth in the second quarter, especially in newer markets outside the U.S.

Netflix expects to add 2 million new international customers, according to a statement Monday on its website. That's fewer than the 3.45 million average of five analysts' estimates compiled by Bloomberg. Domestic customers may increase by 500,000 in the second quarter, Netflix said, compared with the 505,000 average of estimates.

Netflix has pitched itself as a global service that will bring the on-demand TV revolution to countries as diverse as Brazil, Germany and Japan. Investors have anticipated international markets would fuel future growth, especially as the service's growth in the U.S. slows. The company expanded into 130 new international markets in the first quarter, all but completing its global rollout.

"Our international forecast for fewer net adds than prior year is due to a tough comparison against the Australia/New Zealand launch," the company said in the statement.

Netflix fell 8.7% to $98.98 and plunged as low as $92.38 in extended trading after the forecast was released. The stock fell 2.8% to $108.40 at the close, also weighed down by Amazon's introduction of a competing standalone video-streaming service.

"The current leg of the Netflix growth story is based upon international growth," Paul Sweeney, a Bloomberg Intelligence analyst, said in an e-mail. "Any disappointment there is going to rattle investors particularly when Amazon has just announced its streaming only service."

The subscriber slowdown overshadowed first-quarter results that mostly beat analysts' estimate. With a bevy of fresh original shows, Netflix added 2.23 million new U.S. subscribers in the first quarter, beating its own forecast and analysts' estimates amid investor concern over slowing domestic growth.

Netflix signed up 4.51 million customers internationally after expanding to 130 new markets. That brought the worldwide total to 81.5 million. The company had projected 1.75 million new U.S. customers and 4.35 million overseas.

First-quarter net income rose to $27.7 million, or 6 cents a share, from $23.7 million, or 5 cents, a year earlier, the Los Gatos, California-based company said. Analysts were forecasting 4 cents, the average of estimates compiled by Bloomberg. Revenue grew 24% to $1.96 billion, compared with projections of $1.97 billion.

For the second quarter, the company expects to reach 84 million subscribers globally. Profit will be 2 cents a share, down from 6 cents a year earlier.

This year, Netflix will spend $5 billion on programming, exceeding any other U.S. TV network. To help pay for that growing budget, the company will begin raising prices next month for some U.S. and foreign customers. MKM Partners estimates 15 million to 20 million may be affected in the U.S., with JPMorgan Chase & Co. projecting 12% to 15% of those may cancel.

The company also said it plans to raise money in the high-yield debt market later in 2016 or in 2017.

Investors have permitted CEO Reed Hastings to run the company at close to break-even because of his promise of significant profits starting next year. Netflix will have to accomplish that by growing its existing business. The company sells its TV service in all but four territories, and can only expand into one of those, China.

-- Bloomberg News

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