Netflix fell short of expectations in its customer growth in the second quarter, both in the US - where customers declined for the first time - and at its international operations. The company forecast a recovery in the third quarter, with net additions of 7.0 million. The share price fell around 11 percent in after-hours trading.
The weaker customer growth was blamed on the recent increase in prices as well as the timing of new original content. Netflix said this was true for all regions, and somewhat more so for those where the price hike was implemented recently. The company also pointed to the strong growth in Q1, which may have been in anticipation of the content released in Q2. Competition was not likely to play a role, as the market changed little in the past quarter.
Netflix also underlined that its service will remain ad-free, saying "when you read speculation that we are moving into selling advertising, be confident that this is false". The company does not want to compete for ad dollars, only on customer satisfaction.
Slower customer growth
In total, Netflix added 2.70 million streaming customers in Q2, much less than the expected growth of 5.0 million. The total base was 152 million at the end of June. In the US, revenues and the margin were slightly better than guidance, while the international operations were slightly weaker than forecast.
Customers in the US fell for the first time, by 126,000 to 60.1 million. Netflix had targeted growth of 300,000. The contribution margin reached 37.1 percent, two points less than a year earlier.
At the international business, the customer base grew by 2.83 million to 91.5 million. Netflix had forecast growth of 4.70 million. The contribution margin improved to 16.3 percent, a new record.
The DVD business lost another 159,000 customers for a total of 2.41 million. It remains profitable, with a contribution margin of 60 percent.
Cash flow still negative as interest and taxes increase
More customers contributed to more operating cash flow, but this was offset by production spending of USD 3.34 billion. Over the past four quarters, the company has spent a total of USD 13.0 billion on content. This led to a negative operating cash flow of USD 544 million in the quarter. Netflix still grew its cash position by USD 1.66 billion in the quarter to USD 5.03 billion, thanks to debt financing.
The steady issue of debt to finance content has seen the company's interest costs double in the past year and a half, to USD 152 million. The tax bill is also increasing, and reached USD 230 million.
Netflix still maintained its forecast for the full year: an operating margin down slightly to 13 percent and negative free cash flow of USD 3.5 billion (defined as the sum on operating and financing cash flows). Over the past four quarters, that figure was a negative USD 3.23 billion.
