Netflix (NFLX) is down today after lowering domestic subscriber guidance for this quarter. Here’s the details:
Domestic Guidance July 25th:
10 million Streaming only
3 million DVD only
12 million both
25 million total
Domestic Guidance September 15th:
9.8 million Streaming Only
2.2 million DVD only
12 million both
24 million total
Quick Math
Let’s do some quick math here. 12 million people get both streaming video and DVD’s mailed to their homes. My personal plan is one DVD at a time and streaming video through my Xbox 360 for what was $10.88 and what will be $$15.98. Netflix average monthly subscription for paid U.S subscribers was $11.03 last quarter ($769,714 in quarterly revenue and 23,263 paid subscribers). Let’s just say the price rose five bucks for people who get both.
Five bucks per-month per customer times 12 million who get both DVD’s and streaming video is $180 million in additional revenue — with Netflix delivering nothing additional. It rose perices for the same thing it gave us last month. That $180 million is considered pure profit to me.
DVD subscribers were supposed to be 3 million and now that’s looking like 2.2 million. The difference is 800,000 subscribers. Assuming these people would have been paid the $11.03 per-month average from last quarter, that’s $26 million in lost revenue per-quarter. In the end, investors are bitching about revenue that’s $26 million or so under plan when the new pricing kicks in $180 million in pure profit.
Plus, that $26 million in revenue took a lot of work: the company has to order physical DVDs, stock them, mail them, receive them again, repackage. Ugh.
Total Subscribers
OK, Netflix is going through a transitional period and losing customers domestically. Here’s a run-down of domestic subscribers at the quarter’s end since 2009:
Domestic Paid and Free Subscribers
2009 Q1 10 million
2009 Q2 11 million
2009 Q3 11 million
2009 Q4 12 million
2010 Q1 14 million
2010 Q2 15 million
2010 Q3 17 million
2010 Q4 20 million
2011 Q1 23 million
2011 Q2 25 million
2011 Q3 24 million (estimate)
Now let’s take a look at the International side. During the last year NFLX has has an average of 137,000 free International subscribers per-quarter(Try Netflix FREE for 30-days type thing). This 137,000 figure hasn’t been increasing so I backed it out of the figures below, which shows paid International subscribers:
International Paid Subscribers
2010 Q3 1,000
2010 Q4 333,000
2011 Q1 673,000
2011 Q2 967,000
Wow, the company only had 1000 paid subscribers at the end of the third quarter last year, now it has a million. This International expansion has barely touched the tip of the iceberg.
Bottom Line
Look, Netflix management continues to be ahead of the curve, just as it has been for the last five years. When the streaming video concept was first announced by the company years ago the stock didn’t take off then either. I remember.
I bet domestic subscribers go back up next quarter. This losing “customers because we raised prices” thing is hitting this quarter. The customers the company is losing it wants to lose. Renting DVD are going the way of the VCR. The net from the price increase/losing customers could jolt profits before taxes by a hundred and fifty million dollars.
International business is booming — in four quarters the company has grown Internationally from 1000 customers to a million customers. From a thousand to a million. During that time International quarterly revenue has gone from $1000 to $19 million.
What was hurting NFLX stock since the price hike was announced was uncertainty. How many customers will the company lose? Investors don’t like uncertainty. Now we have the figures to put our hands around, and those figures look great. My bottom line is this stock should be up, not down.
Disclosure: Clients of DavidSharek.com own shares of NFLX at the time of publication.
