Will Netflix Overcome Its Challenges from Fiscal 1Q16?
Netflix’s stock price falls on the back of a weak forecast
Netflix (NFLX) recently announced its fiscal 1Q16 earnings, in which it earned total streaming revenues of $1.8 billion and a contribution margin for its streaming business of 17%. Netflix managed to achieve its target with streaming memberships of 81.5 million in fiscal 1Q16.
However, the company’s fiscal 1Q16 earnings got a “thumbs-down” from Wall Street. The company forecasted net additions of only 0.5 million and 2 million members in the United States and international markets, respectively, for fiscal 2Q16. This forecast was lower than Wall Street estimates.
The company’s share price fell 7.9% in after-hours trading on April 18, the day it announced its earnings.
Factors impacting Domestic streaming business
As the above chart shows, the company had total streaming memberships in the United States of 46.9 million in fiscal 1Q16 and net additions of 2.2 million on a sequential basis. Netflix had total streaming revenues in the United States of $1.2 billion with a contribution margin of 35.5%. It’s interesting to note that Netflix also expects a lower contribution margin of 33.3% in fiscal 2Q16.
Netflix is facing increasing competition in the United States from the launch of new OTT (over-the-top) services, including Amazon’s (AMZN) new standalone video service priced at $8.99 per month. Traditional television networks are also launching direct-to-consumer services such as Starz’s (STRZA) service priced at $8.99 per month. Other direct-to-consumer services that already exist in the market include Time Warner’s (TWX) HBO Now and CBS’s (CBS) Showtime.
Netflix is trying to counter this competition through a host of original programming and new technological initiatives.
Netflix stated in its fiscal 1Q16 letter to shareholders that, currently, more than 50% of Netflix’s streaming members in the United States are grandfathered at the old price of $7.99 or $8.99 for Netflix’s HD two-screen plan.
However, the company has stated that in fiscal 2Q16 and 3Q16, it expects many of its US subscribers to be released from the grandfathered-in price and have the option to continue at the SD (standard definition) plan at $7.99 per month or move up to the HD (high-definition) plan at $9.99 per month. Since many of Netflix’s grandfathered-in subscribers have been with the company for the past two to three years, the company is expecting only a “modest” churn from the price increase.
Netflix makes up 0.87% of the PowerShares QQQ ETF (QQQ), which has 11.6% exposure to the computers sector.