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Netflix Preannounces. Economy Pressuring?

chart downEntertainment industries are sometimes called recession proof.  When wallets tighten, retirement gets pushed back, or bills go unpaid, people will spend a little to escape fear and worry.  There’s a need for entertainment in tough times, the theory goes.   The reality is less forgiving: entertainment like anything else can fall victim to a weakening economy.  Entertainment industries are recession resistant not recession proof.   Glimpses of August data may be beginning to prove that point. 

Mirroring a surprise shortfall in August gaming sales, Netflix came out Monday with a surprise adjustment for their third and fourth quarter guidance.  A few weeks ahead of the actual earnings report (October 20th), the Los  Gatos company preannounced that third quarter revenue and EPS will fall within prior guidance but subscriber numbers will fall “just below” the low end of guidance.

“Net subscriber growth in July was in line with expectations but August was unusually weak”, said CFO Barry McCarthy.

For the fourth quarter, Netflix now projects ending subscribers of 8.95m to 9.25m, down from 9.1 to 9.7m.  Revenue is forecast at $353m to $359m, down from $357 to $367m.  GAAP EPS is estimated at 30cents to 38 cents per share, up slightly from a prior range of 29cents to 37cents.  GAAP net income was unchanged.

Netflix didn’t provide further commentary explaining their changed projections.  More information will likely be provided in the analysts call on October 20th.

As with the gaming report, it’s possible the August results were the result of short term factors including distracted consumers (The Olympics and presidential election issues were prominent in August) but it’s more likely August results are a consequence of the greater economic environment. With gaming, more definitive insight will be available following the release of next weeks’ September NPD retail data report. With Netflix, watch for the earnings announcement.

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