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Netflix Domestic Subscriber Gains Slow

14 Oct, 2015 By: Erik Gruenwedel

Shares down in aftermarket trading

Netflix Oct. 14 reported a net gain of 880,000 domestic subscribers in the third-quarter (ended Sept. 30), down about 10% from a net gain of 980,000 subs during the previous-year period.

More importantly, the net additions were below Netflix’s guidance of 1.15 million, and another 100,000 below projections from bearish Netflix analyst Michael Pachter with Wedbush Securities. Netflix ended the period with 43.1 million domestic subscribers, and 69.17 million globally.

International subs grew by 2.74 million, which was well above guidance of 2.4 million and Pachter’s projected 2.5 million.

Regardless, Netflix’s exorbitant stock evaluation is based in large part on the subscription streaming service’s ability to grow subscribers. That would appear to be in the past domestically.

In a shareholder letter, CEO Reed Hastings and CFO David Wells attributed the missed domestic subscriber gains to ongoing transition to chip-based credit and debit cards.

“Our over-forecast in the U.S. for Q3 was due to slightly higher-than-expected involuntary churn (inability to collect),” Hastings and Wells wrote. “Through the first nine months of 2015, we are slightly ahead of prior year.”

The executives expect Netflix to add 6 million domestic subs for the fourth year in a row.

Net income reached $29 million on revenue of $1.58 billion, compared with income of $59 million on revenue of $1.22 billion a year ago. The lower income was due primarily to ongoing foreign expansion, which resulted in a contributing loss of $68 million for international operations compared with a $31 million loss a year ago.

Domestic streaming generated $344 million contribution income, up from $251 million a year ago.

Finally, Netflix’s legacy by-mail disc rental service generated $80 million in contribution income, down 11% from $89.9 million a year ago. It continues to service more than 5 million subscribers.

“The tail on this business should be quite long,” Hastings and Wells wrote.

Regardless, Netflix shares reacted negatively to the domestic subscriber numbers, with the stock down nearly 9% in aftermarket trading.

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