Netflix Surprises With More Users but Weak Outlook

Netflix’s programming costs have cut into the company’s profits. Above, Ellie Kemper appears in a scene from the second season of “Unbreakable Kimmy Schmidt.” ENLARGE
Netflix’s programming costs have cut into the company’s profits. Above, Ellie Kemper appears in a scene from the second season of “Unbreakable Kimmy Schmidt.” Photo: Associated Press

Netflix Inc. NFLX -2.79 % added a better-than-expected 6.74 million subscribers in the first quarter, as a surge in overseas subscribers offset slowing growth in the U.S., but the video streaming service gave a lackluster outlook for new members in the current period.

For the current second quarter, Netflix estimated 2.5 million total additions—500,000 in the U.S. and 2 million overseas, both below year-ago figures for the June quarter. The company also projected revenue and per-share earnings below current analyst estimates.

The weak outlook sent Netflix shares down 10% to $ 97.20 in after-hours trading—despite the company reporting a surprising increase in earnings for the first quarter. Through the close Monday, the stock had risen 33% over the past year.

In the first three months of the year, Netflix gained 2.23 million members in the U.S. and 4.51 million members overseas. In January, the video streaming service had forecast 6.1 million total additions—1.75 million in the U.S. and 4.35 million overseas.

Netflix said Monday that it now has 81.5 million total subscribers. Earlier this year, the company turned on its service in an additional 130 territories, tripling its global reach to 190 countries.

Netflix has said it hopes to complete its global rollout by the end of the year, although it acknowledged in January that hurdles remain to get into China. The company in March struck a deal to enter Hong Kong, joining with its largest pay-TV provider PCCW to be made available through its set-top boxes.

Monday, Netflix said it is continuing discussions but had no material update. “Whatever we do will have only a modest financial effect in the near term,” the company said in its letter to shareholders.

For the second quarter, Netflix forecast earnings of 2 cents a share on revenue of $ 1.96 billion. Analysts, on average, were expecting earnings of 5 cents a share on revenue of $ 2.12 billion, according to Thomson Reuters.

The company said it sees its profitability hurt in the U.S. in the current quarter because of costs from “a large slate of content releases and associated marketing.” Netflix added that it is estimating fewer overseas additions than a year ago because of the “tough comparison against the Australia/New Zealand launch.”

Adding subscribers is key for the Los Gatos, Calif.-based company because it helps to cover the company’s expansion and programming costs. Netflix has said gaining U.S. customers is harder because of its already high penetration rate in the country. The company has come in below its own guidance for U.S. customer additions in each of the past two quarters.

Still, the domestic number is important because U.S. subscribers tend to be more profitable than those overseas. Also, analysts have raised concerns that some U.S. users may drop their membership as grandfathered price increases end.

Netflix said Monday that it expects only a modest loss of members from the higher prices because “these members have been with us for a reasonable period already and because our content continues to improve.”

The company also is facing competition from a plethora of new streaming services like Dish Network Corp. DISH 4.19 % ’s Sling TV, as well as established rivals like Inc., AMZN 1.51 % Hulu and Time Warner Inc. TWX 0.97 % ’s HBO.

On Sunday, Amazon began offering its video-streaming service as a stand-alone option for the first time. A monthly subscription will cost $ 8.99, a dollar less than the most popular plan from Netflix, the company said.

Overall for the March quarter, Netflix reported a profit of $ 27.66 million, or 6 cents a share, compared with $ 23.7 million, or 5 cents a share, a year earlier. Excluding certain items, the company reported per-share earnings of 7 cents.

Revenue rose to $ 1.96 billion from $ 1.57 billion.

Analysts surveyed by Thomson Reuters had projected a profit of 3 cents a share on $ 1.97 billion in revenue. Netflix, in January, had projected earnings of 3 cents a share on revenue of $ 1.81 billion.

Write to Shalini Ramachandran at [email protected] and Maria Armental at [email protected] US Business

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