Netflix subscriber churn 'unexpectedly' higher as users react to end of grandfathered rates

The closing out of grandfathered subscription prices hit Netflix (NASDAQ: NFLX) hard in the second quarter, with users churning out of the SVOD service at higher rates than expected, the company reported.

Netflix saw just 160,000 new subscribers in the U.S. during the quarter, far below its forecast of half a million signups.

The United States, Canada, Latin America, the UK and Ireland, and the Nordics all were impacted by the provider's "un-grandfathering," or raising monthly subscription rates to the current price after keeping them lower for existing subscribers over a two-year period. Netflix said it saw an "earlier-than-expected impact on retention" in all of these regions.

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Subscribership was lower internationally than Netflix had expected, too. The SVOD service saw just 1.52 million signups in the quarter, lower than the expected 2 million new subs.

"Our approach in expanding our global footprint in January was to launch a service targeting early adopters and then to listen, learn and iterate quickly," said CEO Reed Hastings in the provider's letter to shareholders. "Now that we are six months in, we will localize Netflix in Poland and Turkey with the addition of local language in the user interface, subtitles and dubbing. Localization in other markets will take place over time as economically prudent."

Netflix is staying optimistic, Hastings said, and is taking a long view when it comes to international growth.

"In our newer markets, we continue to learn and believe that growth will unfold over a multi-year period, similar to our experience in Latin America," the provider said.

For the second quarter, Netflix reported earnings per share of 9 cents on revenues of $2.11 billion, well above analyst predictions of 2 cents a share. Its U.S. revenues were up 18 percent year over year. International revenue climbed 67 percent year over year.

The company went well outside its forecast when it came to income: Netflix brought in operating income of $70 million, well above its predicted $47 million, and net income of $41 million, compared to the $9 million it expected. Hastings said the variance was due to lower than expected content costs and other costs.

Gross debt remained unchanged at $2.4 billion. Free cash flow remained in the negative, at -$251 million compared to -$261 million a year ago.

Netflix had about $1.8 billion in cash and equivalents at the end of Q2, and plans to raise more capital through the high yield market later this year and into early 2017.

For the third quarter, Netflix expects to sign up 300,000 U.S. subscribers and 2.0 million international subs. The Olympics will likely impact subscriber numbers, Hastings noted.

The provider is also staying optimistic about its full-year forecast: Netflix expects to run break-even for 2016, with growth in operating profit expected in 2017.

Netflix stock took a hit after hours, dropping around 16.65 percent immediately after its earnings announcement to about $82, from its market-close value of $98.81.

For more:
- see the shareholder letter (PDF)
- see this CNBC article

Earnings summary: Tracking pay-TV earnings in Q2 2016

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