KEY POINTS
- TRACKER UPDATE: Our trackers suggests 1Q sub adds for both the US and int'l segments may come in light (more so in the US). The int'l markets appear to be a mixed bag, with the 2014 & 2015 launch markets skyrocketing, while the remainder are declining on a y/y basis. US 2Q sub adds are tracking toward a beat on rebased estimates, which were chopped by more than 50% following the last print. Int'l also appears to tracking ahead of rebased 2Q estimates. Full disclosure, our int'l tracker misfired on the last print. Our US tracker is a rebooted version of an old tracker that has never been tested live.
- WHAT WE THINK IS HAPPENING: As a reminder, we suspect the 4Q16 upside on net subs was driven by a seasonal recapture of churn from 2Q/3Q16, especially in the US given the sudden reversal of a near +2-yr decline in y/y net adds. That should have continued into 1Q since it's also a seasonally stronger/colder quarter, but it's possible NFLX pulled most of that forward into 4Q16. Also, the delayed House of Cards release into 2Q may be creating a y/y 1Q headwind since it's usually released in March. We suspect the delay may have been intended to stem off a potential 2Q decline in US subs. The global upside our trackers are flagging for 2Q may just be a function of the measurement periods (first 15 days in April) since the y/y comp is capturing the initial fallout from the announcement of the 2016 subscription price increases.
- THOUGHTS INTO THE PRINT: We originally thought we may get squeezed on our short after seeing consensus slash their 2Q sub-add estimates following the last print. However, the setup is more muddled now. Our trackers suggest NFLX will miss on 1Q subs, but guide high for 2Q. We suspect the latter would matter more than the former to the street if that were the case; especially since mgmt would likely attribute the 1Q weakness to some transitory headwind (e.g. House of Cards delay). Still, we're being told that the buyside is expecting sub-adds to increase y/y, so if NFLX misses on 1Q estimates that were already flagging y/y declines, we're not sure the buy-side would really chase the print. But also keep in mind that NFLX may not guide to its QTD performance. For context, the last time NFLX missed on int'l subs in 2Q16, it gave itself ample breathing room on the 3Q16 guide, which it beat by its largest margin since at least 1Q14. Further, NFLX's 3Q16 guide called for y/y sub-add trends to deteriorate, yet our tracker was calling for the opposite at the time. That said, mgmt may have already seen the reacceleration it eventually reported when it issued 3Q guidance, but chose to play it safe.
Let us know if you have any questions or would like to discuss in more detail.
Hesham Shaaban, CFA
Managing Director
@HedgeyeInternet
