Netflix Shares Fall as Q2 Subscriber Numbers Disappoint

Arrested Development didn’t scare up very many paying customers

Shares of Netflix fell in after-hours trading Monday as the company’s strong second-quarter revenue performance was undermined by somewhat underwhelming subscriber growth.

As analysts began to react to Netflix’s Q2 earnings, the stock price dropped 6.67 percent to $244.50. While the streaming video service generated $1.07 billion in revenue, up 20 percent from $889.2 million in the year-ago period, lackluster subscriber acquisitions left Wall Street cold.

Netflix closed out Q2 with 28.6 million paying subscribers, up 2 percent or 711,000 subs versus the first quarter. Growth slowed considerably; in the January-March period, the service added 2.44 million paying customers.

Year-over-year comparisons were much more favorable. Since Q2 2012, Netflix has added 5.94 million subs, for an increase of 26 percent.

Domestic streaming accounted for $671.1 million in revenues, up 26 percent from $532.7 million in the prior-year period. International streaming contributed $165.9 million while the CD delivery service kicked in another $232.4 million in sales.

In a note to shareholders, Netflix said the launch of Arrested Development helped generate “a small but noticeable bump in membership.” Other shows, like the Emmy-nominated House of Cards and Hemlock Grove, did not move the needle “because they are less established.”

Speaking to investors during a streaming Q&A with investors, Netflix CEO Reed Hastings expanded on the minimal impact Arrested Development had on the company’s balance sheet. “There was a little rise in net additions, but it was not tremendously significant in the short term,” Hastings said, before adding that it’s not always possible to divine why a customer decides to sign on. “When a subscriber joins, they don’t say, ‘It’s because of Arrested.’”

Netflix chief content officer Ted Sarandos said that while the company would not disclose any specific viewership data for its original series (“our ratings would be apples-to-oranges to a network”), one can safely assume that the shows that have been renewed are hitting their targets. That said, Orange Is the New Black was renewed for a second season weeks before it actually premiered, and House of Cards was specifically developed as a two-season arc. (If Season 2 of Cards is as popular as the first batch, there’s no reason to think that another renewal wouldn’t be in the offing.)

Hastings said that he is interested in picking up a fifth season of Arrested Development, which was nominated for three prime-time Emmys, including one for best actor in a comedy series (Jason Bateman).

“The brand is starting to mean something to viewers already even though we only started doing this in February,” Sarandos said.

Offering guidance for the third quarter, Netflix projects that it will serve between 29.4 million and 30.1 million paying customers. 

In 2014, Netflix will roll out new seasons of House of Cards, Orange Is the New Black and Hemlock Grove. It also plans to premiere the Wachowskis' sci-fi thriller Sense8 and a number of kids titles from DreamWorks Animation.