Netflix ceoEnrique Marcarian/ReutersNetflix CEO Reed Hastings.

Netflix added fewer subscribers than expected in the third quarter and the stock is tanking after hours.

Netflix reported that it added 980,000 domestic subscribers in the third quarter, well below the 1.37 million net adds that analysts were expecting.

Netflix shares were down as much as 20% in immediate reaction in after hours trade following the news.

Netflix reported Q3 EPS of $US0.96, topping expectations for earnings of $US0.93, on revenue of $US1.22 billion against estimates for $US1.41 billion.

The company’s fourth quarter earnings per share guidance also came in well short of expectations, with the company saying it expects earnings per share of $US0.44 against Wall Street expectations for earnings of $US0.84.

In the fourth quarter, Netflix is expected to add 1.85 million domestic subscribers.

In its Q3 letter to shareholder, Netflix said that, “In hindsight, we believe that late Q2 and early Q3 the impact of higher prices appeared to be offset for about two months by the large positive reception to Season Two of Orange is the New Black. We remain happy with the price changes and growth in revenue and will continue to improve our service, with better content, better streaming and better choosing. The effect of slightly higher prices is
factored into our Q4 forecast.”

The company added that, “We are forecasting Q4 US contribution margin to increase almost 500 basis points on a y/y basis, but to decrease slightly sequentially, as it did last year from Q3 to Q4, due to significant sequential increases in content and marketing expense.”

Netflix’s latest quarterly report also comes after HBO announced on Wednesday that it plans to launch a standalone streaming video service some time in 2015.

In its quarterly letter, Netflix commented on the HBO announcement, saying that: “Starting back in 2011 we started saying that HBO would be our primary long-term competitor, particularly for content. The competition will drive us both to be better. It was inevitable and sensible that they would eventually offer their service as a standalone application. Many people will subscribe to both Netflix and HBO since we have different shows, so we think it is likely we both prosper as consumers move to Internet TV.”

Overall, Netflix says there is, “no change to our view on the long term attractiveness and US market size of Internet television, and no change to our view of the ultimate size of our US membership.”

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