Netflix misses Q2 customer targets as growth slows

Netflix’s growth rate slowed in the second quarter, with the company missing its sign-up target as more customers than expected cancelled their subscriptions.

Announcing its Q2 results, Netflix said that it added 1.7 million new members in the quarter – below its forecast of 2.5 million new members and down from 3.3 million in Q2 2015.

The SVOD provider said that churn “ticked up slightly and unexpectedly”, coinciding with its move to increase subscription fees for long-term users – a process Netflix calls “un-grandfathering”.

“We think some members perceived the news as an impending new price increase rather than the completion of two years of grandfathering. Churn of members who were actually ungrandfathered is modest and conforms to our expectations,” said Netflix.

The company is due to complete its price increases over the second half of next year, brining all users in line with its current pricing tiers – which in the US stand at US$7.99 per-month for SD content access, US$9.99 for HD, and US$11.99 for Ultra HD.

“We are growing, but not as fast as we would like or have been. Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business,” said the company in a letter to shareholders.

Netflix’s share price was down more than 12% after the market closed, following its earnings announcement.

In the quarter, the bulk of Netflix’s new additions were international sign-ups. It added 1.52 million international users and 0.16 million US streaming customers, against predictions of 2.0 million international and 0.5 million domestic sign-ups.

By comparison, in the first quarter of this year, Netflix added a record 6.74 million subscribers, a surge which was caused by its launch in 130 new countries at the beginning of this year.

In its Q2 letter to shareholders, Netflix defended the fundamentals of its business, claiming that the parallel growth of SVOD services like CBS All Access, Seeso, Amazon Prime Video, Hulu and YouTube Red are growing “primarily against linear TV hours”.

“That competition did not contribute materially to our miss in Q2,” said Netflix. “We don’t believe market saturation is a key factor in the US given that we experienced similar performance over the same period in multiple countries with differing levels of Netflix market penetration.”

In terms of its earnings, Netflix said it “slightly underforecast” the quarter, ending Q2 with operating income of US$70 million and net income of US$41 million. It largely attributed the variance to “lower than expected content and other costs”.

For Q3, Netflix said it expects to add 0.3 million US subscribers and 2.0 million international customers.