In just a few weeks, investors will get another update from Netflix (NFLX 2.40%). The third-quarter update, scheduled for October 17, will be particularly important because it follows the streaming-video company's weaker-than-expected global member additions in the second quarter. Investors will be checking to see whether Netflix's member-addition headwinds will continue in Q3.
Of course, other areas beyond net member additions will be worth looking at, too. Here's what investors should know about Netflix before it reports earnings next month.
Revenue and earnings per share
For Q3, analysts currently have consensus estimates for revenue and earnings per share of $2.28 billion and $0.06, respectively. This compares to revenue and EPS of $1.74 billion and $0.07, respectively, in the year-ago quarter. EPS is expected to be suppressed by management's ongoing emphasis on aggressively investing in international markets -- investments which management believes will pay off over the long haul.
Notably, analyst expectations for EPS of $0.06 are about in line with Netflix management's own EPS expectations of $0.05.
Net member additions will be worth examining when the company reports results, particularly because Netflix fell short of its own guidance on this metric in Q2. Management had forecast net member additions of 2.5 million, but actual net member additions were 1.7 million.
Management blamed the worse-than-expected additions on press coverage of its price increase. Interestingly, it's not the members impacted by the price increase who seemed to be bothered by it, but rather other members who may have perceived the press coverage as an impending price increase.
"Churn of members who were actually ungrandfathered is modest and conforms to our expectations," Netflix said.
For Q3, Netflix is expecting to add 2.3 million new members -- 0.3 million in the U.S. and 2 million internationally.
Another important clue when Netflix reports results will be any commentary on the progress of the company's international streaming markets.
Growth for this segment is stellar. Netflix's international revenue increased 67% year over year in Q2, but the segment's contribution loss of $69 million doesn't look so nice. And management doesn't expect this to get any better in Q3: Netflix forecast an international contribution loss of $95 million.
But investors should keep the bigger picture in mind. While the growing loss suggests the company can't profit in these newer markets, this isn't the case. The company is actually generating a positive contribution margin from some of its maturing international markets, but it is investing these contribution margins into newer international markets.
Management remains confident these international investments will pay off over the long haul. The company explained in its second-quarter shareholder letter:
We remain confident in these investments because of our success in all of the markets launched prior to 2014 which are individually profitable on a contribution profit basis. These 2010-2013 launch markets are on track to deliver aggregate contribution profit of around $500 million in 2016.
Overall, Netflix's third quarter should demonstrate a transition for the company, as it continues to invest heavily in international markets but aims to boost contribution margins in mature markets with price hikes. While investors should pay close attention to whether net member additions live up to guidance, it's also important to keep the long game in mind.
As Netflix said in its most recent shareholder letter: "Disrupting a big market can be bumpy, but the opportunity ahead is as big as ever and we continue to improve every aspect of our business."