$NFLX COLLAPSES ON LOWER THAN EXPECTED SUBSCRIBER NUMBERS, WARNS FOR THIRD QUARTER

Netflix stock is getting annihilated in the after hours, to the tune of 15%, after the company turned in abysmal subscriber numbers. In a statement by the company, Reed Hastings chalked it up to the companies decision to ‘un-grandfather’ old, low priced, subscriber accounts–exposing millions to fresh price hikes, and not to competition.

Gross additions were on target, but churn ticked up slightly and unexpectedly, coincident with the press coverage in early April of our plan to un­grandfather longer tenured members and remained elevated through the quarter. We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering. Churn of members who were actually un­grandfathered is modest and conforms to our expectations.

On earnings, we slightly under­forecast the quarter, ending Q2 with operating income of $70 million and net income of $41 million against a forecast of $47 million and $9 million with the variance largely due to lower­than­expected content and other costs.

Similarly, we don’t believe market saturation is a key factor in the US given that we experienced similar performance over the same period in multiple countries with differing levels of Netflix market penetration.

Our global membership forecast for Q3 includes an impact from the spectacle of the Olympics, on par with what we experienced four years ago, and does not include any boost in the US from the Comcast X1 launch due to uncertainty on timing.

We expect US contribution margin to improve year over year in both Q3 and Q4 and we anticipate meeting our 40% US contribution margin target by 2020, or even earlier.

Unfortunately, this year the regulatory climate in China for our service has become more challenging. Disney’s streaming service, launched in conjunction with Alibaba, was closed down, as was Apple’s movie offering. We continue to explore options and, in the meantime, have plenty of work to do in our newly opened markets.

Continued US growth will be a part of it and there is no change to our view that in the US Netflix can reach 60­-90 million members. We continue to expect to run around break­even on a net income basis in 2016 and to generate material profits in 2017 and beyond.

We still plan to raise additional capital through the high yield market later in 2016/early 2017.

I see no reason to buy this dip. The company, apparently, fucked itself again by raising prices, reminiscent of 2011.