Netflix misses on EPS, subscriber growth estimates

Netflix shares fell after-hours on Tuesday following the release of its third-quarter results. Subscriber growth slowed for the quarter (adding just 2.2 million new members versus the 2.5 million the company had expected over the summer), although it told investors that "as the world hopefully recovers in 2021, [it] would expect that our growth will revert back to levels similar to pre-COVID." Ines Ferre breaks down Netflix's Q3 results on The Final Round.

Video Transcript

SEANA SMITH: Let's get to some breaking news here. Netflix is out with earnings. Taking a look at shares, they are much lower here after hours, with the stock off just around 6%. Ines Ferre has more on this for us. Ines.

INES FERRE: Yes, Seana, and its streaming subscribers additions for the latest quarter for the third quarter were up 2.2 million subscribers. That's less than what the Street had been expecting. Third quarter earnings per share came in at $1.74. That's below consensus. Revenue came in at $6.44 billion. That's above estimates.

The company is saying that a net change of subscribers will be 6 million for the fourth quarter, so planning to add some 6 million subscribers. But just looking at those subscriber numbers, those did come in below estimates, even below the company's own estimates, which were about 2 and 1/2 million subscriber additions. The Street had thought that that was maybe a little too conservative, and the Street was expecting more than 3 million.

And in a letter to shareholders, the company said, "As we expected, growth has slowed with 2.2 million paid net additions in the third quarter versus 6.8 million in the third quarter of 2019. We think this is primarily due to our record first half results and the pull forward effect we described in our April and July letters."

Remember that in the first quarter, Netflix had added 16 million subscribers. In the second quarter, it added 10 million subscribers. So the company was saying that it had this pull forward effect. It was expecting less subscribers in the third quarter, but that coming in even below the company's own estimates. Seana.

SEANA SMITH: All right, Ines, thanks for that. Dan Roberts, to bring you into the conversation here, we were talking about the subscriber add number, how important that would be for Netflix here for the current quarter. They, of course, lowered their expectations on the heels of the second quarter. Yet this number still missing expectations.

How big of a worry is that for Netflix when we take into account that we're already in the midst of the fourth quarter? We'll have to talk about how much of that subscriber growth was pulled forward to the first half of the year. So this is a problem that the company could be facing over the next-- potentially, over the next several quarters.

DAN ROBERTS: Well, the pull forward and demand. I mean, how much have we talked about this effect during the pandemic? We've talked about it with Peloton, although fears that Peloton was seeing a pull forward in demand looked for now like they were kind of overblown. People are still ordering those things.

But here it is with Netflix. I mean, new subscriber adds in the first half of 2020, which the company quickly points to is a little bit of a guinea to take back the negativity from the press release, 28 million paid sub ads in the first half of 2020, which the company points out was more than it added in all of 2019. So that's a pretty good stat to be able to point to.

And I tend to think that, you know, occasionally when Netflix misses on sub adds and everyone freaks out-- and by the way, the stock right now reacting aggressively, down, like, 7%. It keeps ticking lower, ticking lower after hours. I tend to think usually, it's fine. And people react in the moment. And then the next quarter, they beat. And it sounds like they have a good outlook for the next quarter.

That said, look, there's more competition ever before. I mean, how many times have we talked about the number of new streaming apps that have launched in the last few years, and we say, should Netflix be concerned? Should Netflix be concerned? And in general, we say, well, more competition, but it's still the king. It still wears the crown. It's the kitchen sink. It has the biggest lead, the biggest built-in runway. It had a head start.

All that is still true. But at some point, as more of these things multiply-- I mean, we were just talking about the huge growth Disney Plus has seen during this time and Disney even doing a whole company reorg to shift more resources to Disney Plus.

At some point, the conversation around competition and should Netflix be concerned is going to actually be correct. And the answer is going to be yes, Netflix should be concerned. And suddenly, the competition is really cutting into its lead. And maybe that's what we're finally seeing happen.

I will say, further down in the letter, there is some encouraging stuff in the content section about restarting filming on some of these Netflix originals, "The Witcher" season 2, another season of "Stranger Things." And so, you know, we've talked a lot during the pandemic about how Netflix had a remarkable amount of content stored away, built up, ready to fire.

And now there is some concern, you know, how much of its dry powder has it used? How much of the stuff it was holding onto is now on the platform? Well, now it is starting to film again at last. So, you know, that will be able to refresh the kind of Netflix original content pipeline. But it isn't good. You know, I just tweeted this, but you never want to see an earnings press release start with, "growth has slowed."

JEN ROGERS: Even if we told you it would, which, of course, Netflix did, Dan. To your point about the restarting of production there, their margins have done really well because they did not have production going on. They did not have to be spending to have sets open. They didn't have to be spending to advertise. Operating margins right now forecast for Q4 13.5%, that's versus 8.4% last year. That's a nicer number than some of these subs numbers that we're looking at.

And to your point, Dan, on competition, they called that out in here. I mean, they have name checked YouTube and TikTok, saying that they think they make up a small number of the minutes there. They said that they are actually-- they even talked about Disney's reorg and that they are happy to be competing against Disney right now. Actually, we're thrilled to be competing against Disney at this moment.

I think an important number here is that Q4 forecast of 6 million paid net additions. That's versus 8.8 million for Q4 2019. And they also give a nod to the fact that when you get to 2021, those year over year numbers are going to be declines because, basically, they're not going to be as good as year over year numbers that we've come to expect.

And even though you know that, it's still going to stand out. So they're going to tell us about it now. We need to know more about churn here. And they say engagement has been good, but that's going to be something key to look for.

SEANA SMITH: Certainly will be. And analysts, of course, will be looking for answers to those questions on the call that gets underway in just around 15 minutes from now or so. But again, Netflix stock off the lows here, as we initially saw the stock drop just over 6% on the heels of this report. But again, the third quarter subscriber miss is what's really in focus here for investors right now, with the stock off just around 4.8%.