Netflix Inc. (NASDAQ:NFLX) Loses Domestic Subscription Growth

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By Ross Schwartz on January 12, 2015 Company

Netflix Inc. (NASDAQ:NFLX), the king of online streaming, the ever-growing and evergreen company, the trend-setter reported a disappointing third quarter. The subscriber growth was disappointing enough in the report but the company went on to project a weak fourth quarter as well. In September, Netflix Inc. (NASDAQ:NFLX)’s stock achieved an all-time high value of $489.29. The company’s stock had been losing its value gradually.

The earnings estimates by Netflix Inc. (NASDAQ:NFLX) decreased for Q4 after the result of Q3. In the past 3 months, the Wall Street analysts, who estimated the EPS for Netflix Inc. (NASDAQ:NFLX) in 2015 at $6.59, reduced their estimate to just $4.68. The analysts should be ready for more disappointment. Unless the subscriber growth rate increases, the company’s earnings will fall below even these expectations. The reasons behind Netflix Inc. (NASDAQ:NFLX)’s decline: Rate of domestic growth is decreasing.

In the third quarter, 0.98 million new subscribers joined Netflix Inc. (NASDAQ:NFLX). This was much lower than the number of new subscribers that joined the company in 2013 during the same time period; 1.29 million. The number of new subscribers in Q3 of 2014 is also much less than the expected 1.33 million subscribers that the company had projected for the third quarter. The management team of Netflix Inc. (NASDAQ:NFLX) reasons that the increase in prices since spring has caused the decline in subscribers growth.

Netflix Inc. (NASDAQ:NFLX) expects that the subscriber growth will remain slow in Q4 as well. The company had projected 2.33 million new subscriptions in for Q4, which they have now reduced to 1.85 million. The business model that Netflix Inc. (NASDAQ:NFLX) has adopted involves very high costs of content which will increase gradually. The high costs are actually fees for licensing the content. At the same time, the cost of adding subscribers is low.

Consequently, the domestic subscription rate impacts the domestic contribution profit. The lower the rate the lower the profit. In the third quarter, the content expense increased by $91.3 million to $565.3 million YoY. Netflix Inc. (NASDAQ:NFLX) now needs 3.4 million new subscribers to overcome the increased expenses. In 2013, the number of new domestic subscribers was 6.27 million. In 2014, this number will expectedly fall to 5.65 million.

By this pattern, the company will welcome just 5 million or fewer subscribers in 2015. This means that the domestic contribution profit will be higher. But, the domestic profit growth will be lower than the growth that Netflix Inc. (NASDAQ:NFLX) had achieved about two years ago. These hard facts are accepted by Netflix Inc. (NASDAQ:NFLX) who have changed their estimates and guidance for the new fiscal. The company projected that domestic contribution margins will increase 200 basis points each year from now.

This is in stark contrast to the past few years when Netflix Inc. (NASDAQ:NFLX) crossed the expected 400 basis points in domestic growth.