Netflix Reveals Strong Growth in Q1 But May Face Trouble Ahead

Shaky Q2 forecasts from the global streaming service cause Wall Street to panic and shares to drop.

Netflix has released its Q1 financial results which reveal that the streaming service added 6.74 million subscribers in the first three months of 2016, up 1.86 million year-on-year. This brings the total number of Netflix users globally to 81.5 million.

In the US, the company added 2.23 million members, representing a slight decline compared to the same quarter last year, however this is to be expected when considering the substantial growth in the number of competing OTT services and potential market saturation. Domestic revenue grew 18% in the period, totalling $1.16 billion.

Internationally Netflix had stronger growth, adding 4.51 million subscribers since Q4 2015 and seeing a 15% increase in revenue to $652 million. This can be partly attributed to the service launching in over 130 countries simultaneously earlier this year, bringing the total number of territories it operates in to 190. The company said:

In most of these markets, so far, Netflix is offered only in English and payment methods are limited primarily to international credit cards. In the coming quarters, we will add more local languages, content, payment options and customer support.

Looking forward, the company forecasts that it will add 2.5 million members in Q2, split into 0.5 million domestic and 1.5 million international, whilst total revenue will fall just shy of $2 billion. Following the announcement, Netflix shares plunged by up to 15% as the numbers were way below Wall Street growth expectations.

Commenting on the cautious forecast in its statement, Netflix tried to shift some of the blame on issues in the Australia/New Zealand markets and increasing content and marketing costs. The company expects strong year-on-year margin growth to resume in Q3 however and “remains on track to achieve 40% US contribution margin by 2020″.

There is still no material update on Netflix’s ongoing battle to launch in China. Check out this article I wrote last year about the specific problems the company is facing within the territory.

Unlike when Netflix amended its results at the last minute in Q1 2015 to comment on the launch of HBO Now, the direct-to-consumer SVOD service from the cable channel, there was no such activity in response to the Amazon announcement yesterday that it was unbundling its OTT service from the annual Prime subscription. I asked Tamsyn Attiwell, VP Global Services at Zuora, who are experts in subscription and other commercial models, for her thoughts on this move from the e-commerce giant and she said:

Netflix must be watching Amazon’s launch of Prime Video as a monthly, stand-alone subscription service in the US very closely – because it has gained yet another competitor. Netflix is still the leading video streaming service with far greater reach, but freeing video from its annual Prime package should give Amazon the potential to expand its subscriber base dramatically.

However, the big issue here isn’t Amazon versus Netflix. It’s about the meteoric shift in the industry, away from linear broadcasting and towards streaming content that is curated for each user and available when they want to watch. The traditional broadcasters need to sit up and pay attention – and transform their offerings – to avoid even more cords being cut.

In an effort to grow ARPU, Netflix plans to begin an un-grandfathering process from next month that will continue throughout 2016. All US customers who are signed up for the HD 2-screen plan at a discounted rate will begin to be charged the appropriate fee, however the company notes it does not expect brand trust to be impacted.

Growing revenue will enable Netflix to continue its aggressive content strategy. In its statement, the company committed to upping its annual content spend to $6 billion in 2017, compared to $5 billion in 2016.

Every quarter original content seems to be more and more at the forefront of Netflix’s roadmap and it is no different this time around – the company has committed to producing 600 hours of its own programming this year alone. As it grows internationally, it claims there will be an increased focus on diversifying its video library to appeal to all tastes.

Interestingly, the company revealed that it spends 5% of its cash content budget on feature films. Taking a swipe at the film industry, which has been under pressure over the last month due to the announcement of day-and-date service ‘The Screening Room’, Netflix said:

As we learn, we may spend beyond that, once we’ve established that new, fully exclusive movies debuting on Netflix creates more consumer excitement and member viewing than the territory­by­territory licensing of nine­month­old “Pay One” movies that are also available on TVOD and DVD.

Finally, DVD memberships continue to decline, falling to 4.7 million members and $72 million in contribution profit.

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