Netflix (NFLX) Slammed as Domestic Subscriber Additions Seen at Risk

(Updated - June 10, 2016 11:55 AM EDT)

Netflix (NASDAQ: NFLX) is sharply lower Friday (-2.66%) following cautious comments from M Science (formerly ITG) analyst Corey Barrett on second quarter domestics subscriber additions.

Barrett said based first two months of data for the quarter, they are establishing a Q2 paid domestic streaming net subscriber addition estimate of 450,000, below guidance of 500,000 and the consensus estimate of 516,000. He notes this does not capture any
impact from the migration of grandfathered subscribers to higher-priced subscriptions..

Further, the analyst said churn appears elevated in Q2, but said was not directly from the price increase. "Looking at the cohort of subscribers that were paying $7.99 as of March, we tracked this group as a fixed panel through April and May and saw effectively no migration to higher-priced plans," he said. "This is evidence that the grandfathered subscribers have not yet been migrated to a higher price, from a billing standpoint, although some have received emails about the upcoming price change. However, despite the lack of a billing impact on the grandfathered subscribers, we have witnessed elevated churn thus far in Q2. Based on our data, churn in May 2016 was higher than May 2015 and May 2014 and almost as high as May 2013."

Barrett said he would view their below-consensus Q2 domestic net add estimate with a negative bias, as churn associated with the price increase is not contemplated in their estimates.

The analyst said Q2 and Q3 churn risk is significant, but they have no observations yet on the magnitude of the risk. "We estimate the average churn rate across Netflix's domestic streaming subscriber base is slightly above 2%. All things considered this is remarkably low structural churn for a service that is easy to cancel and billed monthly. However, we anticipate that in the month a subscriber's price increases, average proclivity to churn should increase" He said the will not have observations of the related churn until they have the full month of June data, but notes every 1% churn impact creates a ~200,000 headwind to net adds in the respective period. To the firm's knowledge, not all of the 21 million grandfathered subscribers have been given notice of the price increase. Consequently, they would expect the churn impact of the price migration to be roughly split between Q2 and Q3.

Also, the analyst said the Summer Olympics in Rio could create a 370,000 to 415,000 subscriber headwind to net streaming subscriber additions, domestically, in Q3. "Based on our historical data from 2012, the Summer Olympics in London drove a 40% increase in churn during August 2012, relative to the average of the preceding and following three-month periods, the analyst said. "We believe Netflix could experience similar headwinds this August, which will see the Summer Olympics run August 5-21."

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