3 Key Concerns From Netflix (NFLX) Quarter; PT Cut to $115 - Needham & Company

Needham & Company analyst, Laura Martin, kept her Buy rating on shares of Netflix (NASDAQ: NFLX) but cut her target price as US subscriber growth failed to impress. The subscriber slowdown highlights other issues such as negative cash flow and falling contribution margins at the streaming business.

NFLX reported generally positive 1Q16 results with revenue of $1.958B, and GAAP EPS of $0.06 (up 16% y/y). 1Q16 total paid sub adds reached 6.87mm (estimate was 6.35mm). International paid subs added 4.56mm (estimate was 4.35mm) and US paid subs added 2.31mm (estimate was 2mm). 2Q16 Guidance is for US paid sub adds of 700k in 2Q16 and 2.3mm for international. The analyst reduced hersubscriber estimates for 2Q16 and FY16, and therefore lower 2016 estimates and her target price to $115 (from $125).

Three key concerns (besides competition):

1) Contribution margins for Total Streaming fell from 17.7% in 1Q15, to 17.0% in 1Q16, and is guided to fall again, to 16.4%, in 2Q16.

2) Grandfathering of lower monthly fees for 2- stream subscribers will largely end over the next 3-4 months in the US as the 2- stream service moves up to an ASP of $9.99/month. This may work against the netadded subscriber numbers over the next 1-3 quarters, which is the cornerstone of NFLX’s share price.

3) Negative $1B FCF. NFLX reiterated that it will report negative $1B of free cash flow in both FY16 and FY17, and maybe longer depending on investment opportunities.

For an analyst ratings summary and ratings history on Netflix click here. For more ratings news on Netflix click here.

Shares of Netflix closed at $108.40 yesterday.

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