'Strong but not stellar' quarter for Netflix shows higher profit, but slower subscriber growth
Netflix released second quarter earnings after stock markets closed on Monday, and while the streaming giant revealed it added fewer new customers than anticipated, it still added more than 5 million people to its customer base in the past three months.
Bloomberg analyst Geetha Ranganathan was expecting the company would add about 5 million overseas customers during the quarter. Heading into earnings, the company said it had added 7.4 million new customers overall in the first quarter and the company was projecting to add another 6.2 million this quarter.
The numbers came in just shy of those projections, with the company revealing on Monday that they added 5.15 million new customers — 4.47 million of which came from non-U.S. markets.
International streaming subscriptions make up more than half of Netflix's value, according to a recent research report from investment firm Trefis.
But adding new customers isn't enough: the company has to keep producing high-quality originals to maintain that growth and keep its customers happy.
Bloomberg expects the company to release 700 global original releases this year, and says Netflix is on track to spend $8 billion making them — $1 billion higher than it expected.
Analysts at J.P. Morgan expect the company will burn through up to $4 billion this year feeding its growing need for content. And next year could be even worse.
In its earnings, Netflix reported that it spent $559 million in cash during the second quarter. That's less than the $608 million it spent in the same quarter in 2017, but the cash burn keeps the company on track to blow through as much cash as J.P. Morgan was forecasting they would this year.
On top of growth, the company has begun to focus on its profitability.
The company says it expects its operating margin to improve to between 10 or 11 per cent this year. On the high end, that's an increase of up to four percentage points from last year.
J.P. Morgan is expecting Netflix's gross profit to be $6.4 billion in 2018, up from $4 billion last year.
Shares sell off after numbers come out
Prior to the earnings coming out, Netflix shares were changing hands at around $400 US apiece. The shares sold off after the numbers came out, however, as investors focused on the slowing subscriber growth.
Netflix shares lost about $50 or 12 per cent in after hours trading.
J.P. Morgan thinks the stock should be worth about $385 a share.
"[Netflix] may well be the best global, secular growth story in tech," J.P. Morgan said, "and we believe investors would likely take advantage of any earnings-related weakness."
In the quarterly results, CEO Reed Hastings said the company knows it will face even tougher competition moving forward, with rivals such as Disney, Fox, Comcast and other players moving into their streaming turf. But while he described the quarter as "strong but not stellar," the CEO was confident in the company's trajectory.
"Our strategy is to simply keep improving," Hastings said in the letter to shareholders, "as we've been doing every year in the past."
Netflix shares have doubled in value this year, and just this week the company surpassed HBO with the highest number of Emmy nominations of anyone, with 112.
It's the first time in 17 years that a content creator other than HBO has led the way in nominations.