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Netflix, Inc. Rose Above Seasonal Trends in This Q2 Report

By Anders Bylund - Jul 17, 2017 at 7:03PM

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A large collection of eyeball-magnet original content helped the company exceed its own guidance targets, with 5.2 million net new subscribers globally.

Digital-video giant Netflix (NFLX -0.58%) reported second-quarter results after the closing bell on Monday. The company exceeded many of management's official guidance targets, thanks to strong consumer interest in the second-quarter slate of Netflix Originals.

Netflix's Q2 by the numbers

Here's how this report compared to the year-ago period and to guidance figures:

Metric

Q2 2017 Result

Q2 2017 Guidance

Q2 2016 Result

Domestic streaming subscribers

51.9 million

51.5 million

47.1 million

International streaming subscribers

52.0 million

50.5 million

36.1 million

Total revenue

$2.79 billion

$2.78 billion

$2.11 billion

Operating margin

4.6%

4.4%

3.3%

Net income

$66 million

$66 million

$41 million

Diluted earnings per share

$0.15

$0.15

$0.09

Data source: Netflix.

The tally of U.S. Netflix subscribers has now increased 10% year over year, and this quarter's domestic subscriber growth was the strongest second-quarter performance Netflix has seen since 2011.

International customer additions also came in above expectations, and this segment has grown 44% larger over the last four quarters. For the first time, international streaming subscribers outnumbered their American counterparts.

The bullseye on the bottom line could easily have been a large surprise in either direction. Netflix recorded a greater-than-expected tax benefit in the second quarter, offsetting a $64 million non-cash charge to account for currency-exchange losses on the $1.4 billion euro-denominated bond the company issued in April.

As usual, Netflix's free cash flows were negative in the second quarter. The cash burn amounted to $608 million this time, up from $423 million in the first quarter and $254 million in the year-ago period, all due to the large cash expenses involved in producing original content rather than licensing movies and shows from third parties.

Dots left unconnected

The earnings report did not mention China, at all, so we don't know exactly how the company intends to record the contributions from a streaming-video partnership with Baidu (BIDU 1.19%) and its iQuiyi video service.

Management also resisted any temptation to discuss the cancellation and single-shot resurrection of science-fiction drama series Sense8, though the topic of canceled shows made a brief appearance in the earnings release. Management wrote:

We strive to be bold in our programming choices and financially disciplined, so we can keep being bold. Every show has passionate fans and committed talent striving for excellence. Sometimes those shows don't attract as many viewers as we had hoped, compared to our other content. As much as we dislike ending a series early, it consoles us that it frees up investment for another new show, or two. We are programming to please our members and we keep that as our guiding light.

That principle brought back Sense8 for a final cap to the series, a two-hour special slated for release next year. It's unclear whether fan pressure could be expected to drive Netflix's series-renewal strategy in any larger sense.

Woman on couch, so excited about what's on her tablet that she's spilling her popcorn.

Image source: Getty Images.

What's next?

Looking ahead, the original-release slate is slowing down over the summer, which should lead to somewhat slower subscriber growth rates in the third quarter. The company aims for about 3.7 million net new international subscribers next quarter, along with 750,000 domestic additions. Revenues should stay close to a 30% year-over-year growth rate, landing near $3.0 billion, and operating margins are projected to stick close to the full-year target level of 7%. On the bottom line, this should add up to earnings of roughly $0.32 per share.

In other forward-looking statements, Netflix's management noted that free cash flows are likely to stay "negative for many years," but international services should report positive contribution profits for the full year of 2017. That would be a first.

Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool has a disclosure policy.

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