KEY POINTS
- TRACKER UPDATE: Our trackers suggests NFLX is heading toward a consecutive miss on global sub adds in 2Q. We estimate that the biggest miss will come from the int'l markets, with the larger 2011-launch markets dragging on improving y/y trends in most other int'l markets. The US appears to be accelerating given the comp effect, but also appears to be heading toward a miss as well. While still early, 3Q appears to be an exacerbation of the 2Q trends mentioned above, with the international markets deteriorating on a y/y basis, while the US continues to accelerate. All in, NFLX appears to tracking toward a miss on 3Q int'l estimates, beat on 3Q US estimates.
- WHAT WE THINK IS HAPPENING: We believe the US is benefiting from the combination of the depressed comp and the shift of House of Cards into 2Q. Remember 1Q US sub adds were down +800K y/y, which we suspect was exacerbated by the House Of Cards delay that was probably intended to stem off a potential decline in total US subs in 2Q. In short, NFLX appears to have shifted a portion of its subs adds from 1Q into in 2Q. Int'l may just come down to mix and comps. We estimate that 2Q/3Q16 would have been much worse (potentially negative in 2Q) if not for considerable strength in the 2011-launch markets, which now appear to be declining y/y on a sub-add basis. Those declines could just be a function of the comp, or an early indication of rising maturity in those markets, which could mean persistent declines in sub-add growth trends similar to the US. Conversely, the remaining int'l markets that were heavily impacted by ungrandfathering are now sharply accelerating off a depressed comp, but likely not enough to compensate for the weakness in the larger 2011-launch markets, at least as it relates to estimates. Collectively, that translates to another quarter of potential y/y declines in int'l sub adds, especially with no new markets to offset those losses.
- THOUGHTS INTO THE PRINT: Last quarter we thought that mgmt may play it safe with its 2Q int'l sub guide (despite early strength QTD) after falling short on 1Q sub adds since that's how it appeared to handle the 3Q16 guide under similar circumstances. However, we suspect mgmt chose to guide to what it was initially seeing in 2Q sub adds without offering itself much of a buffer for slippage, which is what appears to have happened starting in May. If our trackers are right, then NFLX is facing a consecutive miss in int'l sub adds, and deteriorating trends into 3Q. If so, we suspect mgmt will guide to QTD trends rather than consensus expectation since 1) a 3rd consecutive miss in 3Q sub-adds would hinder credence in its guide moving forward, and 2) NFLX probably isn't raising capital after this print since it did so after the last one. In short, we suspect the 2017 debate around growing/declining sub adds to end following this print. Further, any incremental color from mgmt on China (non-event) will take the wind out of those sails. Collectively, we suspect those who have been renting the stock this year to abandon the name following this print.
Let us know if you have any questions or would like to discuss further.
