Not if you look at revenue: despite fewer subscribers, Netflix's revenue rose by $33 million or 4% compared to the second quarter. Year-over-year revenue is up 49%.
Its net income did decline quarter-over-quarter, however. But that's because its subscription expenses rose -- not because of its revenues. Netflix continues to invest in its streaming business, which investors should see as a positive. As its library of titles gets more robust, subscribers will be more interested in the streaming service and will be more willing to pay Netflix's higher price. Oh, and year-over-year net income was up 65%.
Troubling Q4 Guidance
But investors care about the future, not the present. And Netflix revealed some additional troubling information about the fourth quarter. It expects domestic subscriptions to decline between 7% and 14% this quarter. That's bad, but the company also believes that its pain has already peaked. It says subscription declines will diminish in future quarters.
Also, almost its entire decline in subscriptions is expected to come from Netflix's DVD-by-mail service. Since Netflix knows that streaming is the future, DVD-by-mail subscribers leaving shouldn't trouble us as much as if streaming subscribers were fleeing the service.
Netflix further expect its revenue to be approximately flat to up 4% this quarter -- so this decline in its subscribers should be pretty easily absorbed by the company, thanks to its price hike. But it does expect its global profit to decline as well, by as much as 70%. In Q1, income will go briefly negative. But these weak profits are obviously not due to declining revenues -- they're due to more investment and the company's international expansion.
The Qwikster Debacle
In response to company outrage, Netflix announced in September that it would separate its streaming and DVD-by-mail business, calling the latter "Qwikster." But less than a month later, the company changed its mind: Netflix would remain a single company.
This episode might make investors question whether Netflix's management has any clue what it's doing. Is the wondrous Netflix story they believed earlier this year broken? Maybe, but it's also a relatively young company. Management makes mistakes. The Qwikster nonsense looks like a hasty, poorly thought out reaction to investors freaking out over the company's subscriber decline. You could even argue that the company deserves some credit for realizing that its idea of splitting up the company wasn't a good one, so it quickly reversed course.
Netflix's Potential Remains the Same
Few have been more critical of Netflix's recent behavior than I have. I worried that its price hike could lead to a big subscriber drop and lower revenues. We haven't seen either and probably won't. I also feared that the initial Qwikster decision lacked foresight, but the company quickly reversed it. Netflix is actually faring fairly well, under the circumstances. Yet here's Wall Street's reaction: