One thing we know about this week’s Netflix quarterly earnings call – it was “great.” First, because investors immediately bid up NFLX by 25%. Second, because Erin Kasenchak, Netflix Director of Investor Relations, told us so.
In fact, Kasenchak said “Great” as a one-word sentence fourteen times during the call.
But what the transcript of the call doesn’t show is any stated, data-driven proof of the impact of House of Cards on members, revenues, or profits. Somehow, though, following the call, we came across this headline on Paid Content:
“The House of Cards Effect: Netflix Tops $1B in Q1 Revenue…”
Additionally, within a Motley Fool article alarmingly headlined “Warning: 3 Red Flags In Nextflix’s Q1 Report” we saw this statement: “During the first quarter House of Cards drove more than 2 million new U.S. streaming subscribers…”
There are a ton more of these incorrect statements across the InterWebs.
They are all incorrect because nowhere in its earnings call, nor in its pre-released “Letter to Shareholders,” did Netflix management claim House of Cards did anything quantifiable.
In the second sentence of its shareholder letter, management said this:
“We added over 2 million members to the [U.S. streaming] service, launched to great reception our first Original series of 2013 House of Cards, …”
You are an idiot if you claim that is anywhere near cause and effect. We are more concerned about why Netflix used a capital “O” with the word “original.”
There was also this:
“The launch of House of Cards provided a halo effect on our entire service…”
You are a genius if you see anything factual worth repeating in that statement.
During the Q&A portion of the earnings call, CEO Reed Hastings said this:
“…if in Q1 we had seen, for example, the week before House of Cards launched and the week after a big spike, I think then we would be forecasting bigger numbers…what we’ve seen with House of Cards is a very nice impact but a gentle impact, not one that’s an overnight impact.”
Later, Hastings refused to give any details to a question asking for specific viewership numbers for House of Cards:
“Well, I think when you look at Netflix you get to invest in Netflix not a particular show.” This is a nice way of getting your Dick Cheney-ish “go F yourself” point across.
Meanwhile, the only other reference to HOC in the shareholder letter was this:
“The global viewing and high level of engagement with the show increased our confidence…”
Note the lack of numbers – how many viewers? what precise “level” of engagement?
Interestingly, a couple of paragraphs later is this:
“On April 19, we launched all 13 episodes of Hemlock Grove…viewed by more members globally in its first weekend than was House of Cards…” So, this means we should expect to see Netflix add more than 2 million new U.S. streaming members this quarter, no?
Management claims that over-the-top subscriber sign- up is seasonal (!!!), and has forecast that new adds will come in at 530,000 – one-quarter of what we just saw in Q1, and exactly the same increase as Q2 of a year ago. WTF?
Later, management catches itself in a lie about new members:
“This coming Q2, however, we have Arrested Development, and momentum from lots of new content coming to the service, so we expect to see slightly higher net additions than Q2 a year ago.” Except that the midpoint of its official guidance is 530,000 – as we said above, the exact same as Q2 2012.
Yet, if you recall our analysis in our February 6 post on Netflix, we said Netflix needed 2.5 million new members to pay back each “Original” series.
So, with the shortfall of 0.5 million on House of Cards, and now the release of Hemlock Grove and Arrested Development in the current quarter, that means Netflix will need net adds of 5.5 million in Q2.
Management’s guidance is off by 5 million. It is short.