Wednesday 18 September 2019

Netflix's tight-lipped culture makes earnings surprises difficult to avoid


Netflix’s latest results surprised many investors. Photo: Lucy Nicholson/Reuters
Netflix’s latest results surprised many investors. Photo: Lucy Nicholson/Reuters

Kamaron Leach and Lucas Shaw

Netflix's biggest earnings surprise in years sent shares plummeting the day after results were released, leaving analysts and investors wondering why they were caught so off-guard.

When some companies know that their quarterly results are going to fall short of forecasts, they put out a pre-announcement, or update their guidance. But not Netflix. Instead, the company dropped a bombshell with no warning: its customer growth was roughly half what it projected, and it actually lost US subscribers.

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That has not happened since 2011, when the company made a disastrous attempt to split up its streaming and DVD-by-mail operations.

The fallout on Thursday included the worst stock rout in three years, with the stock declining 10pc to erase more than $16bn (€14bn) of its market value.

"You would think Netflix would want to update guidance or give a pre-announcement, as I'm sure they definitely knew about this for a while," said Nick Licouris, an investment adviser at Gerber Kawasaki. "But they probably didn't want to do it because they were going to take a hit at that time or during earnings - especially since subscriber numbers are the number-one thing analysts look at - and in earnings, you can spin it better than a stand-alone announcement."

Another reason not to issue a warning was that the company met most of Wall Street's financial estimates, such as sales and profit. It was only the subscriber numbers that really came up short. "Revenue was very close to guidance and profits were actually above, so I'd guess they didn't think it was necessary to pre-announce a weak sub number when other financial metrics were fine," said Andy Hargreaves, an analyst at KeyBanc Capital Markets.

Netflix, based in Los Gatos, California, did not have an immediate comment.


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