Netflix Drops on Weak-Growth Forecast

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Netflix’s programming costs have cut into the company’s profits. Above, Ellie Kemper appears in a scene from the second season of “Unbreakable Kimmy Schmidt.” ENLARGE
Netflix’s programming costs have cut into the company’s profits. Above, Ellie Kemper appears in a scene from the second season of “Unbreakable Kimmy Schmidt.” Photo: Associated Press

Netflix Inc. NFLX -2.79 % beat its projection for subscriber growth in the first quarter, but the streaming giant’s disappointing forecast for its international business compounded concerns about slowing U.S. expansion, sending shares down about 6% in after-hours trading.

The Los Gatos, Calif.-based company added 6.74 million subscribers in the first quarter, ahead of its estimate of 6.10 million. That was due, in part, to a surge in overseas growth as the company launched in 130 new markets.

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The second quarter is shaping up to be more challenging. Netflix predicted it will add two million international subscribers, compared with 2.37 million in the year-ago period.

That is “below street estimates and reflects an unexpected slowdown despite the fact they just went global,” said Drexel Hamilton analyst Tony Wible. “Investors will want to dig into that more.”

In the U.S. market, even though subscriber growth beat Netflix’s estimate, it fell slightly from the prior year, continuing a trend from the previous two quarters. Netflix expects to increase its U.S. base by just 500,000 customers in the second quarter, compared with 900,000 last year.

The streaming juggernaut now faces twin challenges: at home, it must find ways to expand even as it raises prices and contends with fierce competition from Amazon and Hulu, and an array of other services targeting cord-cutters. Abroad, the company will have to manage Wall Street expectations as its uneven rollouts in foreign markets raise the prospect of sometimes-gyrating results.

Netflix attributed its projected second quarter international slowdown to the fact that last year’s period was buoyed by results of launches in Australia and New Zealand, and this year a big chunk of the bang from launching in 130 countries came in the first quarter.

Netflix executives acknowledged that their crystal balls are cloudy as they seek to predict outcomes in new markets where they have little experience. “Five years ago, I think we thought maybe we could anticipate most things,” said Netflix Chief Financial Officer David Wells. But “we can’t anticipate everything.”

Still, Netflix Chief Executive Reed Hastings said “by going so broad, we’ve increased our rate of learning.”

Domestically, Netflix has long said it believes the market for its services is about 60 million to 90 million houses—well beyond the scale of even HBO. But now some analysts believe the true ceiling is at the lower end of that range.

“I think the domestic penetration ultimately is in the 60-70 million homes range,” said Guggenheim Securities analyst Michael Morris. Mr. Wible believes it’s more in the range of 55 to 60 million.

The company has acknowledged that adding net subscribers is getting more difficu
lt because its penetration already is so high.

Mr. Hastings said reaching the target would be easier if more U.S. cable TV providers market the company’s service and make it available through their set-top boxes, though he also had faith in “the fundamental draw of Internet TV” that is fueling continuing sign-ups.

Globally, Netflix ended the first quarter with 81.5 million total subscribers and said it expects to break through 100 million subscribers sometimein 2017.

Netflix last year raised the price of its most popular plan by a dollar to $9.99 a month, and existing subscribers who initially were “grandfathered” at the lower rate will lose that protection starting in the second quarter. In a shareholder letter, the company warned this could lead to higher churn, or service cancellations.

As the domestic market matures, analysts say Netflix must rely more on price hikes to power revenue growth. The question is whether it has the “ability to raise prices by a dollar every two years,” Mr. Wible said.

The competitive landscape is fierce. Amazon said Sunday it will offer its streaming video service as a standalone option for the first time—rather than as part of a Prime free two-day shipping subscription—and will price it a dollar cheaper than Netflix’s most popular plan.

Hulu’s basic service is $7.99 a month. And a host of other services are competing for cord-cutters’ attention, including HBO, Showtime and a “skinny” TV bundle from Dish Network Corp. DISH 4.19 % ’s Sling TV.

Many analysts believe Netflix will be able to hold its own in this field, as consumers who are cutting the cord and dropping pay-TV subscriptions will sign up for multiple streaming outlets including Netflix.

Adding subscribers at a brisk pace is key for Netflix because it helps to cover the company’s ballooning expansion and programming costs. Netflix said it is boosting its content spend of $5 billion this year to $6 billion in 2017.

In the first three months of the year, Netflix gained 2.23 million members in the U.S. and 4.51 million members overseas, compared with 2.28 million and 2.60 million, respectively, in the same period the previous year.

Overall for the March quarter, Netflix reported a profit of $27.66 million, or 6 cents a share, compared with $23.7 million, or 5 cents a share, a year earlier.

Shalini Ramachandran at shalini.ramachandran@wsj.com and Maria Armental at maria.armental@wsj.com



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