Netflix (NFLX) Q2 Earnings To Gain On Subscriber Growth, ARPU

Netflix (NASDAQ:NFLX) is set to report second-quarter 2019 results on Jul 17.

Management anticipates subscriber addition in the U.S. streaming segment to plunge 65.5% year over year to 0.3 million in this seasonally slow quarter (first and fourth are seasonally strong quarters for Netflix in terms of subscriber addition). The company added roughly 1.74 million paid domestic subscribers in first-quarter 2019.

Moreover, the January price hike is expected to have a negative impact on domestic subscriber growth rate. Per AP, the price hike range of 13-18% was the highest in Netflix’s history. Price for the company’s most popular plan was increased from $11 to $13 per month.

Additionally, Netflix expects International streaming subscribers to grow 2.6% year over year to 4.7 million, which is modest compared with 7.86 million paid members added in the last reported quarter.

The Zacks Consensus Estimate for Net Subscription Additions - Domestic Streaming stands at 0.324 million. Moreover, the consensus mark for Net Subscription Additions - International Streaming is pegged at 4.762 million.

However, the price hike in domestic and various overseas markets is expected to boost Average Revenue Per User (ARPU). Netflix expects Streaming ARPU to grow more than 2% sequentially. Excluding unfavorable impact of currency, streaming ARPU is expected to increase 7%.

Netflix, Inc. Revenue (TTM)

Netflix, Inc. revenue-ttm | Netflix, Inc. Quote

Click here to know how the company’s overall Q2 performance is expected to be.

Content Spending, Marketing Expenses & Free Cash Flow

Investors expect the second-quarter 2019 earnings call to provide a sneak peek into Netflix’s content plans and spending strategy.

Competition is intensifying in the streaming space. Apart from established platforms like Hulu, HBO and Amazon’s (NASDAQ:AMZN) Prime Video, upcoming streaming services from Disney (NYSE:DIS) , Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T) pose significant threat to Netflix’s dominance.

Disney, Comcast and AT&T are now looking to remove their popular movies and shows from Netflix. Disney is set to pull its movies and shows from the platform ahead of the launch of Disney+ in November. Netflix is also set to lose hit shows, Friends and The Office, to AT&T’s HBO Max and Comcast’s NBC, respectively.

Netflix has been spending aggressively to build its original show portfolio. Moreover, in order to maintain its dominant position, the company is spending heavily on marketing activities. However, these have affected Netflix’s profitability and free cash flow.

Marketing expenses increased 14.9% year over year to $616 million in first-quarter 2019. Consolidated contribution margin (revenues minus the cost of revenues and marketing costs) contracted 50 bps on a year-over-year basis to 22.9%.

Moreover, Netflix reported free cash outflow of $460 billion compared with $287 million in the year-ago quarter. Further, streaming content obligation at the end of the first quarter was $18.9 billion.

Reportedly, the company is planning to scale down spending on original big budget projects, which it believes have less chances of gaining rapid viewership. The focus on producing quality content at affordable cost is expected to slow down cash burn rate, thereby boosting free cash flow.

Netflix currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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