Netflix Plunges On Revenue Miss, Ugly Guidance, Deteriorating Fundamentals

At last check Netflix' stock was down about 10% following an earnings report that was about as ugly as they get. While the company beat Q2EPS consensus of $1.12, coming with a number of $1.26, it missed revenue estimates of $790.5 MM at $789 MM. What's worse, it forecasted Q3 EPS of $0.72-$1.07, far below the $1.23 consensus, while it sees revenues of $780-$805 MM on consensus of $842 MM. And digging deeper, the rot was pervasive in virtually every line item. But don't worry: according to NFLX, it is now bearing the Pirate Bay scourge. Not. But at least Jim Cramer loves it.

Other ugliness:

  • The company anticipates its current Qtr end subscribers of 24.6 million (up from 22.8 million) to barely grow to a range of 24.6 to 25.4 million
  • Gross profit declined to 37.9% from 39.0% sequentially, and from 39.4% Q/Q
  • The domestic subscriber acquisition cost jumped from $14.38 to $15.09
  • Average monthly revenue per subscriber dropped to $11.49 - the lowest in the past 3 years, and certainly the lowest under the current business model
  • The company had 1.3 million free domestic subscribers, and 110K foreign subs
  • Of the company's $86 million in cash from operations, $40 million came from working capital: a traditional "source" of cash for the company
  • Take away this traditional, but non-recurring working capital fudge and instead of adding $25 million in cash, the company would have burned through $15 million in cash in Q2.

And much more in the linked excel file. The company's full presentation can be found here, which has one notable item: the company is actually boasting that it is beating Bit Torrent piracy:

Netflix beating Bit Torrent piracy


In May, analysts at Sandvine published a report on global broadband trends suggesting that people are watching and downloading more video over the Internet than ever before. Given the popularity of our streaming service and the growth we’ve experienced in streaming subscribers and hours viewed, we were not surprised by this finding. What did pleasantly surprise us was how we compared to other providers of Internet video. Our low cost, high quality, on demand streaming service has become so good that the largest percentage of the Internet’s traffic is for paid content instead of illegal free peer-to-peer sites like Bit Torrent. Over coming quarters we’ll see if we can recreate this “beat piracy” feat outside of North America.

Translation: Pirate Bay is starting to eat Netflix' lunch. Yet another translation: time to IPO Piratebay and pair trade by hedging with NFLX.

As for those expecting an immediate boost to earning courtesy of the recent price spike in services, dont hold your breath:

We didn’t change the pricing for our streaming only subscribers, and those members will get to enjoy more and better streaming content going forward. Subscribers who only want DVDs from us are happy with the introduction of DVD only plans, because they can pay $7.99 instead of $9.99, a 20% savings. It is expected and unfortunate that our DVD subscribers who also use streaming don’t like our price change, which can be as much as a 60% increase for them from $9.99 to $15.98, when it goes into effect for each subscriber upon their renewal date in September.


Some subscribers will cancel Netflix or downgrade their Netflix plans. We expect most to stay with us because each of our $7.99 plans is an incredible value. We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we’re working hard to further improve the quality and range of our streaming content in Q4 and beyond.


In Q3 we will see only the negative impact of the pricing change, given that the announcement was early in the quarter and that the increases won’t take effect until late in the quarter (September 15th on average). We expect domestic net additions in Q3 to be lower than the previous year Q3, and because of the timing of the price change, revenues will only grow slightly on a sequential basis.

Net result: the chart below.

And updated:

At least Reed Hasting's weekly automated 5,000 shares dump plan is helping restore much needed confidence in the long-term prospects. Oh wait...

And another way to see it: