Netflix revenue misses forecast, but adds surprise 5.59M new customers

While Netflix's (NASDAQ: NFLX) revenues in the fourth quarter of 2015 came in slightly under analyst estimates at $1.82 billion, the SVOD provider's subscribership jumped by 5.59 million during the period, bringing its total worldwide subscriber base to 74.76 million.

The subscriber figures were a surprise for investors, who sent Netflix shares up more than 5 percent in after-hours trading immediately following its earnings announcement. The provider had forecast 5.15 million additions.

Netflix saw earnings per share of 10 cents on a profit of $43.2 million in the quarter, down from 19 cents per share previously on profits of $83.4 million. Analysts were expecting a profit of 2 cents per share on revenues of $1.83 billion, The Wall Street Journal reported.

The company's subscriber base climbed by 17 million in 2015. The provider's U.S.-based subs totaled 45 million as of the end of the year.

Netflix warned that its growth could slow in its established markets, however. "Our high penetration in the U.S. seems to be making additions harder than in the past," Hastings said in the company's quarterly investor letter.

An issue with banks issuing new chip-enabled credit and debit cards, which Netflix said caused many involuntary cancellations, continued to impact revenue in the fourth quarter. However, CFO David Wells emphasized on the company's earnings call that the card problem is a "background issue" that isn't a major concern. "I don't think we're the only one (experiencing this) … I think because we're a recurring merchant … we have optimized our recurring billing system and our approach and it's very sensitive to it," he said, adding that other disruptions could arise internationally that might also have an impact. "We'll always have a global issue where there's … disruptions to the current systems that we have."

A looming issue for the company's second and third quarters will be the end of grandfathered pricing for its U.S. members. To continue on the provider's mid-tier HD plan, long-time subscribers will have to start paying $9.99 per month, $2 more than they do today. Netflix won't cut them off if they don't want to pay, however: They'll have the option to continue at $7.99 monthly on its lowest SD-quality, single-device tier.

With its international profitability at stake, Netflix is putting a number of other strategies in place to attract and keep subscribers. The provider added an in-app signup feature for its iOS app, among other things, and is initially targeting wealthier customers in most of its new countries. The company earlier this month announced a global expansion to more than 100 new countries.

"We are starting primarily by targeting outward-looking, affluent customers with international credit cards and smartphones," Hastings' shareholder letter said.

"We're starting off definitely appealing to elites," said Hastings on the company earnings call. "I mentioned that in Russia and Eastern Europe … Vietnam and Cambodia we're in English. So we're serving elites. You can think of them in shorthand as iPhone owners. They paid $800 for an iPhone. They're comfortable with entertainment in English. So for them, $8 to $10 is a sweet spot price. Certainly in future years as we try to expand to the mass market we can look at additional pricing options."

As for Netflix's new support for in-app purchasing on Apple's platform, the company said it will likely aid in gaining new subscribers. "It's a positive, it's not transformational but it's a really nice positive, in particular in new markets around the world where we're less known and less trusted," Hastings said. "The comfort level for customers in terms of using Apple's payment method versus entering their international credit card has been helpful."

Netflix hopes to see profitability in its international markets by 2017. Hastings as usual stayed coy on the company's plans to enter China. "We're talking to different partners, building relationships. This could be a very long term look, many years of discussions, or it could be faster than that," he said. 

For the first quarter of 2016, Netflix forecast revenues of $1.81 billion and is expecting 6 million more subscribers to join the service in that period, with just 1.75 million additions in the U.S. The provider expects to continue seeing losses internationally of $114 million in the first quarter as it focuses on its launch initiatives.

For more:
- see the investor letter
- see this WSJ article

Related articles:
Netflix blocks VPN proxies to its out-of-region content
Netflix goes global: SVOD service launches in 130 countries today, but China still MIA
Netflix promises to shave 20 percent from bandwidth with new approach to variable bitrate

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