Credit card companies snap back at Netflix chip card claims

Credit card companies pushed back against Netflix (NASDAQ: NFLX) claims in its third-quarter earnings report that the industry's conversion to chip cards led to less-than-expected subscriber signups in the U.S.

"If this was an issue, it would be affecting every subscription-based business and it isn't," an unnamed card-industry executive told The Wall Street Journal.

Netflix recorded only 880,000 U.S. subscribers in the third quarter, well below analyst forecasts of 1.25 million new subs.

Other industry experts expressed skepticism, saying that the industry has put safeguards in place to prevent the kind of disruption Netflix said is occurring. One such program offered by Visa and Mastercard payment networks, which Netflix reportedly participates in, automatically updates expiration dates and security codes for customers whose cards are automatically charged each month by merchants, utilities and other businesses.

SVOD provider Netflix's free cash flow continued to be worrisome in the third quarter of 2015, dipping another $29 million sequentially to reach -$252 million. Shares fell after the company missed analyst expectations on revenue and subscriber numbers, a drop that Netflix blamed partly on, of all things, chip cards.

Netflix saw earnings per share of 7 cents on revenue of $1.74 billion, well below Wall Street estimates of 12 cents on $1.75 billion, according to Business Insider, citing Bloomberg.

Shares dropped 11 percent in after-hours trading immediately following the company's earnings announcement, from its Wednesday market close of $110.23 to $99. The stock showed signs of stabilizing in continued trading, however.

Netflix CFO David Wells said on an earnings call that the banking industry's shift to chip cards was partly to blame for the SVOD provider missing estimates on subscriber numbers. The provider signed up only 880,000 new users instead of Wall Street's forecast 1.25 million users.

"Anytime you have to update your payment method it presents an opportunity not to do that. It just means that there's more noise introduced into that and we think it's a contributor," he said. "It's likely multi-factored. There may be other things going on but certainly the transition to chip cards, that has to be a factor." Wells noted that the banks are only about one-third of the way through the transition to chip cards, "so we'll continue to see that."

Subscribership worldwide continued to climb, reaching 69.17 million memberships and is on track to reach 74 million by year end, the company reported.

Internationally, Netflix's top officers touted the success of its original series Narcos, which is a huge hit in Brazil and is popular in Japan, as well. Having the show resonate in Japan is interesting because, Chief Content Officer Ted Sarandos said, Netflix has found that "Japan ... is more local than we thought it would be."

That discovery wasn't necessarily surprising, Sarandos added. "Every time we launch in a new market we know more in that first 24 hours of viewing than we did from a year of research." Still, user demand in each country tends to be determined by the content that viewers have access to, he said.

Sarandos said that his team's focus continues to be on negotiating global rights. Getting sellers "into a global mode" and dealing with fragmented rights for series is still a challenge. "We're negotiating directly with the producers so [we] can get to the rights before they get fragmented."

Netflix is continuing to expand into more countries; it will launch in Spain, Italy and Portugal next week. CEO Reed Hastings stayed mum on any potential entry into China. "We're still learning a lot. Nothing really specific or helpful except we're still in the early stages," he said on the call.

For the fourth quarter, Netflix forecast that it will add 1.65 million users in the U.S. and see EPS of 2 cents.

For more:
- see this WSJ article
- see the shareholder letter
- see this Business Insider article

Related articles:
Netflix an acquisition target? The case for and against
Netflix's $1 price hike encourages investors … temporarily
Netflix's potential $6B original content drive could have ripple effect on licensing costs

Updated Oct. 21 to include credit card companies' response to Netflix earnings report.