As Netflix Reports 2Q Earnings, Sub Growth Key

Netflix reports earnings Monday afternoon and investors are looking for signs that the streamer is making money and expanding its subscriber base both in the U.S. and internationally.

Netflix stock dropped immediately after its first quarter earnings report. Though those numbers were healthy, the company’s second quarter guidance for subscriber growth was unexpectedly conservative. The shares have recovered and are now up 2% since the earnings report.

Earlier in the month bearish reports on the increased competition in the streaming sector and the impact of Brexit hurt Netflix shares, but as earnings approach, more upbeat reports surfaced.

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Analyst Mark Mahaney of RBC says Wall Street estimates are reasonable, but mainly, he’s a bit more conservative. In a recent report, he said key factors to focus on are subscription metrics and trends, domestic streaming contribution margins and international losses. He maintained his outperform rating for Netflix shares.

Mahaney expects Netflix to meet its guidance of 2 cents a share and have revenue of $2.105 billion for the quarter. That’s a bit lower than the Wall Street consensus of 3 cents a share and $2.112 billion in revenue. A year ago, the company earned 6 cents a share.

Netflix said it expects to add 500,000 subs in the quarter in the U.S. and 2 million subs internationally.  Both of those numbers would be down from the Q2 2015.

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Mahaney expects third quarter guidance to be 6 cents a share, lower than Wall Street's guess of 7 cents a share. Wall Street thinks Netflix’s subscriber growth guidance will be 774,000 in the U.S. and 2.853 million internationally, but Mahaney expects Netflix coming in a bit short of that.

Rich Greenfield, analyst at BTIG, published a list of investor concerns about the company. He notes that some investors are shorting Netflix, which means they’re betting the stock will go down.

The questions include: “How threatening is a successful Hulu virtual MVPD to Netflix domestic growth prospects? Will Netflix be ready for a future without Disney? And is content becoming too expensive to drive global profits and free cash flow?" Greenfield also wants to know if Netflix usage is slowing as competition builds.

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Despite the questions, Greenfield is bullish on Netflix.

“Our confidence in Netflix’s long-term prospects has grown. Consumers increasingly love the breadth of Netflix’s content, with the level of high-profile original and licensed content increasing notably again in 2017. Despite industry chatter that top content creators were going to cut-off Netflix, Netflix has recently licensed high-profile original content from Disney’s Marvel, Warner Bros and syndicated from CW content," he said. “Distributors have realized that they can no longer deny access to the content consumers want if they hope to win the battle for the living room – with Comcast recently agreeing to offer Netflix on X1 boxes.”

Bullish in the long term is Jim Mueller, senior analyst at Motley Fool.

Related: TV Business Getting Poor Reception on Wall Street

Mueller notes that Netflix had beat its guidance for sub growth in 36 of the past 41 quarters, and he expects the company to do that again.

“Many on Wall Street think that Netflix has overstretched itself with its rapid international expansion and paying hefty price tags for content. What these analysts are missing is that the company knows what its subscribers watch, down to whether you yourself finished the latest House of Cards season. That gives Netflix a clearer understanding of the value of content versus anyone else. As Netflix expands internationally, it will learn, refine, and become more efficient,” Mueller said. “That should lead to profitability internationally over the next few years, just as it’s led to profitability domestically. Keep your eye on that point and ignore the quarterly hand-wringing of those on Wall Street.”

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.