Netflix gains 7% as Q2 profits beat, subscriber losses not as bad as feared

Mario Tama/Getty Images News

Netflix (NASDAQ:NFLX) is 7% higher after hours as it kicked off earnings season in Communication Services stocks by topping its guidance with a smaller-than-expected loss in subscribers (but still another decline).

The streaming pioneer saw a net drop in 970,000 subscribers in the second quarter, after warning it expected a drop of 2M. And it's forecasting a return to growth in Q3, guiding to net adds of 1M (down from a prior-year 4.4M adds in Q3).

It also beat profit expectations, reporting EPS of $3.20 per share vs. expectations for $2.95 per share, on revenues that largely came in line with expectations at just under $8B.

Membership growth was better than expected and "foreign exchange was worse than expected," the company notes, saying revenue growth was 9% but would have been 13% in constant currency.

"We’re in a position of strength given our $30 billion-plus in revenue, $6 billion in operating profit last year, growing free cash flow and a strong balance sheet," the company says.

For the third quarter, it's forecasting revenues of $7.838B - down slightly sequentially, but up 4.7% year-over-year - and operating income of $1.255B on an operating margin of 16%. It's expecting global streaming paid memberships that shrank to 220.67M in Q2 to swell back to 221.67M in Q3, or 3.8% year-over-year growth.

The company's pointing to the strong dollar again, saying its expectations for 5% revenue growth in Q3 would mean 12% in constant currency.

The company's quarterly executive earnings interview - where J.P. Morgan analyst Doug Anmuth will put questions to co-CEO Reed Hastings, co-CEO and Chief Content Officer Ted Sarandos, Chief Financial Officer Spence Neumann, and Chief Operating Officer/Chief Product Officer Greg Peters - is set for release at 6 p.m. ET.

Comments

[v2krdr]

No mention anywhere of their public break from the woke culture and woke programming.

[Arthur Shatz]

It's amazing that they never had better controls over users improperly sharing passwords. Probably cost them a fortune over time.

[nerd_rage]

@Arthur Shatz Their attitude for years was "who cares, it's great marketing." Their competitors don't care either. If password sharing was such an economic drain, then why did NFLX spend years not caring and why do competitors not care at all?

I think this is mainly scrambling and desperation. NFLX knows they won't make much $$$ off this crackdown but they need to be seen to be doing something because their actual problem - inability to be as efficient in content spend as competitors who have big IP - isn't something they can actually solve.

[Cathy Wood]

Terrible numbers but love the price action
Gives me room to short

[SomeGuy14]

So now profits matter but subscriber losses are ignored? Isn’t the whole story stock about subscriber gains?

This market is still in a euphoria phase.

[msimonis]

@SomeGuy14 They weren't ignored. The stock dropped hundreds of dollars on the 2 million loss projection. I guess the market thought it was over sold when they only lost 1 million. Makes sense.

[nerd_rage]

@SomeGuy14 What they really should pay attention to is ARPU. They're losing subscribers in their most lucrative markets and gaining them in their least lucrative markets. They need a strategy for defending their lucrative markets against competition and holding down content costs in the least lucrative but I didn't hear anything on either topic.

[PanicFirst]

Dumb. Have fun with the recession...

[VinnV]

This should be a boon for the rest of the sector if even this pick is performing.

[Gladiator321]

@VinnV You're thinking about Roku, Warner and stuff? Yes, maybe.

[GR Value]

Netflix $600 to $200 = 66% loss - 20% to inflation since the high.

Yeah great strat. Buy at $250 before $125 also,

[$CLU]

It just means that All other streaming services will be following suit for shared accounts and ads.
"Well, I'll just leave them all!"
You go right ahead there. No one will miss your indignant attitude.

[Seeking more alpha than you]

@$CLU exactly. Life will go on without them.

[nerd_rage]

@$CLU Ads, yes. Some of them already have ad-based tiers. That's not a competitive advantage for NFLX.

Password sharing, hmm. Competitors don't seem to care, isn't that odd? I think that means this isn't much of an issue to begin with. Just a smokescreen to distract us from the real problem.

[WNB]

Nice. Let's squeeze shorts until December or even longer.

[Dukebailey]

Revenue up 8.6% yoy, but content assets up 19.2% yoy. Three ways to view this:

*Invested heavily into future growth, which will return in a big way
*Invested heavily, and got relatively little in return
*Accounting is suspect

[nerd_rage]

@Dukebailey Future growth is in low-ARPU regions while the most lucrative market, North America, is being hit most heavily with competitive pressures (which are bound to percolate outwards to the rest of the world). If content spend continues unabated, this isn't going to work long term. Growing in lower-ARPU regions requires more budget discipline so let's hear about that. And maybe ad-based tiers and possibly password crackdowns will help, but get spending under control too.

[Dukebailey]

@nerd_rage I question the accounting - the last 12 months adjusted FCF is just over $100 million, but the Net Income over the same time frame is $5.1 billion. 🤔

[mctrader329]

@Dukebailey They mentioned in the ER that covid caused anywhere from 5 to 10% increase in content costs. While that doesnt fully reconcile what your looking into, it does close the gap.

[ErikInvest]

Suicide stock

[101VET]

Don’t underestimate Asian subscribers. There is a lot of content on Netflix dealing with Asian culture. Each country that has something on Netflix it’s actually a point of pride.

[Z Hu]

@101VET Asian countries have SO many other online sources for the same content. Either pirated or legal.

[Winnertakesall]

This is a very cheap stock....

[ValuebutshouldbeGrowth]

@Winnertakesall by what measure? for a 1% fcf yield only growing top line due to price increases and losing subs (for now)

[Djreef1966]

This should help the entire sector.

[1winner]

@Djreef1966 LOL how?? this still awful news. Its showing a former growth beast is now done growing....

[Longbow Archer]

@1winner 9% growth on a 19% comp is done growing?

They are growing slower and guidance is lower.

[1winner]

@Longbow Archer they lost 1M subs!!! Hello…the only reason this not a rev decel is bc they massively increased prices

[Longbow Archer]

FCF positive again. Keep it up Reed.

[1winner]

not sure this the all clear to go ALL IN on the markets unfortunately. basically it shows that things are bad, and will continue to get bad

[Cristi_an]

maybe the next ERs are “not as bad as expected” and will fuel an amazing rally

[nerd_rage]

There's no point of NFLX saying "it's so unfair, if the dollar wasn't so strong, it would be X." Well you're a global company and you have to take the strong dollar into account in making decisions about your overseas business. Raise prices or control content costs or both.

[Devn1]

@nerd_rage you look mad they are providing disclosures..how much you lost on your puts?

[Aceinmysleeve]

@nerd_rage it does matter to the extent currency ratios are cylical in that the future may see trends in the other direction.

A model that considers currency is gonna be stronger than one that doesn't. The USD is at a 20 year high vs euro.

Now in other markets I don't know how likely directions are to change. Most of lat am seems to love their socialism.

Overall I see nothing to be excited about for Netflix investors. Time to hitch to Tesla folx, yeehaw

[mctrader329]

@Aceinmysleeve ugh how about an ER that didnt crash the stock price?

[PDXGuy]

Would Bill Ackman buying now? I follow him what he does.

[Gerrymander]

using "not as bad as feared" is always a glowing review