What to Watch for Netflix This Quarter

Netflix (NASDAQ:NFLX) has seen massive growth in the last few years, and it's not slowing down. In this Industry Focus segment, market analysts talk about what numbers they'll be focusing on in Netflix's upcoming quarter, how it's done in those metrics in the last few quarters, and what that means for the company's long-term potential.

A full transcript follows the video.

This video was recorded on Oct. 13, 2017.

Dylan Lewis: Why don't we look at this upcoming quarter? They're going to be reporting next week. What should people be looking for? I know last time they reported, you put together this great article honing in on six specific metrics that really showed how they blew the doors off the quarter. What are you looking at this quarter? What are you watching?

Danny Vena: Pretty much like everybody else that follows the company, one of the things I'll be watching for is subscriber growth. It's worth noting that Netflix has been very accurate when it comes to forecasting subscriber growth. You can go all the way back a decade, and if my memory serves, I think they've come in on the low side probably half a dozen times in more than a decade.

Lewis: That's a pretty impressive track record.

Vena: I'd love to have a track record like that.

Lewis: [laughs] I think we all would. So, what are they looking at for this upcoming quarter?

Vena: For the quarter that's coming up now, they forecast an overall increase of about 4% subscriber growth, which will be divided up about 750,000 new subscribers domestically, and about 3.65 million new international subscribers. So, they're looking at their overall subscriber growth to grow from just under 104 million to just over 108 million.

Lewis: And we talked about the different elements of that revenue number for them. With prices increasing and then continuing to draw in new users, that should bode pretty well for the top line, right?

Vena: Absolutely. Right now, they forecasted their revenue would increase approximately 30% year over year. The prior quarter, up to $2.969 billion. So, just under $3 billion in revenue for the quarter. And they're also looking for earnings per share to more than triple from $0.12 a share to $0.32 per share. Sorry -- just less than triple.

Lewis: So, we're seeing a consistently profitable Netflix, which is a little surprising for a lot of people.

Vena: A lot of people, when they look at Netflix, they confuse the cash flow situation with the earnings situation. Netflix has been spending an extremely high amount of cash. They're going to spend $6 billion this year on content. But a lot of that money is borrowed, and it has to be paid back over time, so it's not really affecting their earnings potential right now. It will gradually, over time. But, again, if you take that content cost and stretch it out over four or five years, the time that they will earn subscribers over that content, it's a lot different than the cash flow, because they're putting out money upfront to create this new content.

Lewis: One thing I want to go back to briefly with the point you made earlier was looking at what the net adds for subscribers will look like. Looking at that 750,000 domestic and 3.6 million international, I think we're going to see the continuation of a trend that really first got on our radar last quarter, where international becomes the majority of users for Netflix. For a long time, that wasn't the case, and they finally broke through that recently.

Vena: That's exactly right. In fact, this will be the first quarter where paid international subscribers should exceed paid domestic subscribers. As you mentioned earlier, Netflix gives out a 30-day free trial to pretty much anybody who wants it. They get the free trial, and many of them keep the service. So, there's always those non-paid subscribers in the mix. But for this quarter, they're expecting paid international subscribers to exceed 52 million subscribers versus 51 million for domestic.

Lewis: Which is what you want to see long-term, because we're noticing, there seems to be some market saturation happening in the United States. This is something we're going to touch on in the second half of the show. For this company to really live up to the growth expectations currently priced into it, they're going to have to become staples of content for all these foreign markets, right?