Following Netflix's (NASDAQ:NFLX) earnings release on Wednesday afternoon, investors are mostly focused on the streaming-TV company's worse-than-expected second-quarter subscriber growth. This isn't a surprise, of course. Netflix missed its own guidance for net paid member additions during the quarter by 2.8 million.
But investors shouldn't let this single figure overshadow the rest of the key data revealed in the quarterly update. After all, Netflix didn't underperform on every metric. Indeed, despite the company reporting weak subscriber growth, revenue was about in line with expectations and earnings per share were above analysts' average forecast.
Netflix's second-quarter revenue came in at $4.9 billion, in line with both management's guidance for the metric and analysts' average forecast. This represented a 26% year-over-year increase in the company's top line -- an acceleration from 22% revenue growth in Q1.
Second-quarter revenue growth exceeded Netflix's 22% increase in paid members over the same time frame. This outsize performance was due to the company's price increases that rolled out during the quarter, namely a significant one in the company's important U.S. market. Highlighting the impact of price increases on the quarter, average revenue per user increased 9% year over year. This was driven by a 12% increase in the U.S. and 7% internationally, management explained.
Meanwhile, Netflix demonstrated the scalability of its business model as its operating margin expanded 250 basis points, from 11.8% in the second quarter of 2018 to 14.3%.
Earnings per share fell from $0.85 in the year-ago quarter to $0.60 but were above management's forecast for $0.55 and analysts' consensus estimate for $0.56.
Finally, Netflix stuck with its outlook for negative free cash flow (operating cash flow less capital expenditures) of -$3.5 billion in 2019. In addition, management still expects free cash flow to improve in 2020 and beyond, eventually reaching a positive figure. After reducing its outlook for the key figure earlier this year (from a previous forecast for -$3 billion to an outlook for -$3.5 billion), it was good to see management stick with its recently revised estimate.
A robust outlook
Management seems to expect its strong financial momentum to carry over into Q3. The company guided for yet another acceleration in its revenue growth rate. Management forecast third-quarter revenue to rise 31% year over year to $5.2 billion. Further, Netflix importantly expects to return to EPS growth during the quarter. Management guided for EPS of $1.04, up from $0.89 in the third quarter of 2018.
Of course, investors should take these forecasts with a grain of salt. Just as Netflix missed the mark on its subscriber forecast for Q2, the company can miss its financial forecasts as well. It's the company's policy to provide quarterly guidance that is as accurate as possible. In other words, Netflix doesn't lowball its forecasts. With this guidance method, the company will underperform its outlook from time to time.
Still, investors should take note of Netflix's financial momentum.
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