Despite adding over 3 million members in Q3, ending the period with 53.1 million global members and $1.22 billion in revenue, Internet entertainment streaming service Netflix says net additions were lower than forecast, particularly for the US. It also said it planned substantial further expansion internationally.
In its Letter to Shareholders, Netflix said it added about a million new members in the US, ending Q3 with 37.22 million members, with lower net additions than forecast and versus the prior year. Domestic streaming revenue of $877 million, in line with forecast, grew 25 per cent y/y and faster than membership resulting from the expansion of ASP from the price changes implemented in Q2.
“We added two million members internationally, to end the quarter with 15.84 million members, with lower net adds than our forecast, but higher than prior year. International revenue of $346 million, in line with forecast, grew 89 per cent y/y, and faster than membership, again due to the expansion of our ASP,” it explained, adding that for the prior three quarters, it under-forecasted membership growth, but for Q3, it over-forecasted membership growth.
“Separate from forecast variability, year on year net additions in the US were down (1.3 million in Q3 2013 to 1 million in Q3 2014). As best we can tell, the primary cause is the slightly higher prices we now have compared to a year ago. Slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US,” it said.
“In hindsight, we believe that late Q2 and early Q3 the impact of higher prices appeared to be offset for about two months by the large positive reception to Season Two of Orange is the New Black. We remain happy with the price changes and growth in revenue and will continue to improve our service, with better content, better streaming and better choosing. The effect of slightly higher prices is factored into our Q4 forecast,” it continued.
Noting that its per-member viewing and retention in the US was “as strong as ever” Netflix didn’t think increased competition from piracy, TV Everywhere, Amazon Prime Instant Video, Hulu, etc., was a major factor. “There is no change to our view on the long term attractiveness and US market size of Internet television, and no change to our view of the ultimate size of our US membership. We are forecasting Q4 US contribution margin to increase almost 500 basis points on a y/y basis, but to decrease slightly sequentially, as it did last year from Q3 to Q4, due to significant sequential increases in content and marketing expense,” it advised.
Netflix noted “a very successful” September launch in France, Germany, Austria, Switzerland, Belgium and Luxembourg, adding about 66 million broadband households to its addressable market, and that in recent days, its app had gone live on set-top boxes from SFR in France and Deutsche Telekom in Germany, and that it expects deployments in Q4 from Orange and Bouygues in France, and Belgacom in Belgium.
“We’ve had more success, more quickly, with MVPD set-top boxes in these new markets than anywhere else in the world,” it noted. “As expected, we have a full quarter of new market expenses weighing on our international contribution margins in Q4, increasing contribution loss from Q3 to Q4. Our international markets launched prior to this year (Canada 4 years ago through Netherlands 1 year ago) are now collectively profitable on a contribution basis and will continue to help us fund new markets. Moreover, contribution margin from our first expansion market, Canada, now approximates the US,” it said, adding that given how well its international expansion had performed, it intended substantial further expansion in 2015, consistent with its stated strategy.
Shares of Netflix fell up to 25 percent in after-hours trading.