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Analyst: Netflix to Lower New Sub Forecast by 1.5 Million

8 Oct, 2012 By: Erik Gruenwedel

Netflix is expected to lower its year-end new domestic subscriber growth projection by as much as 1.5 million when it reports third-quarter results Oct. 23, according to an analyst.

At the beginning of the year, Netflix caused a bit of a stir when it said it would add 7 million net new streaming subscribers by the end of the year. In doing so, the Los Gatos, Calif.-based streaming pioneer set itself a benchmark analysts have been hammering on ever since — especially after it failed to register half the projected new subs by the end of the second quarter.

Netflix needs subscriber growth to pay for its aggressive foreign expansion, including new subscription video-on-demand service launching in Scandinavia in the fourth quarter, and burgeoning content license costs and rollout of original programming.

While the service’s 24 million domestic streaming subs generated an operating income of $83 million in the most recent fiscal quarter, international streaming business lost $89 million. At the same time, Netflix continues to shed disc subscribers (850,000) through scant marketing and executive indifference. Ironically, the disc rental business — underscored by hybrid disc/streaming subs — generated $134 million in operating profit and 46% of its margins.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said the influx of SVOD competitors — driven by Amazon Prime Instant Video and others — exposes Netflix vulnerability. He said Amazon’s recent co-opting of Netflix heretofore exclusive movie streaming deal with Epix was significant since the deal constituted approximately half of the new feature film content (eight years and younger) offered by Netflix.

The analyst said Amazon’s move to acquire Epix movies suggests it is about to launch a standalone SVOD service in direct competition with Netflix. David Wells, Netflix’s CFO, downplayed those concerns during a recent investor event when he said Netflix already had surpassed in subscribers Amazon-owned LoveFilm Instant in the United Kingdom and Ireland.

Regardless, Pachter said all-important growth of subs in the United States isn’t materializing.

“We expect Netflix shares to again trend down after the company reports Q3 earnings, as we believe investors will again be disappointed in second-half domestic subscriber additions, given unrealistic guidance and increasing competition,” Pachter wrote in an Oct. 8 note.


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