Netflix's (NFLX -2.52%) torrid growth has been in the spotlight recently. In the company's first quarter, the streaming-TV giant impressively added 7.41 million net new members during the quarter -- a first-quarter record. In addition, its revenue growth accelerated substantially. The strong quarter added to its impressive momentum last year, when total members increased by 24 million -- up from 19 million net additions in 2016.
Going into Netflix's second quarter, investors will be looking for the streaming-TV company's impressive overall performance to continue. But, as usual, one metric will see intense scrutiny: Netflix's second-quarter net member additions. The metric gives investors insight into how well the service's content is appealing to customers amid intensifying competition.
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Expect more big growth
In Netflix's first quarter, the company's 7.41 million net member additions globally were more than 1 million higher than the 6.35 million members management expected. Management said the quarter's outperformance was primarily attributable to two factors: Netflix's ever-growing slate of content and the ongoing secular trend of consumer adoption of internet-based TV.
Looking to Netflix's second quarter, management clearly expects both tailwinds to persist. The company's guidance for 6.2 million net member additions globally is 19% higher than the 5.2 million net member additions Netflix saw in the year-ago quarter, which was a second-quarter record.
Of course, given Netflix's recent ability to consistently report net member additions above its guidance range, investors will likely be hoping the internet media company reports net member additions above its guidance -- perhaps closer to 7 million.
Looking ahead
Beyond its second-quarter net member additions, investors will also likely look to Netflix's guidance for its third-quarter net member additions. Again, investors have good reason to have high expectations for this figure as well.
While current member addition trends serve as one reason to believe Netflix can add record third-quarter net members, another reason to have high expectations is the company's plans to ramp up content marketing -- particularly in the second half of the year.
Management explained why it's upping the ante with marketing in its first-quarter shareholder letter:
We're investing in more marketing of new original titles to create more density of viewing and conversation around each title (i.e bigger hit in a nation or demographic). We believe this density of viewing helps on both [customer] retention and acquisition, because it makes our original titles even less substitutable. Because we operate in so many countries, we are able to try different approaches in different markets, and continue to learn.
Given the company's strong member growth trends and its plans for more aggressive content marketing, investors should look for Netflix to guide for about 6.1 million to 6.4 million net member additions in Q3.
Netflix's ability to continue growing its members is important to investors because the company is currently burning through substantial amounts of cash. Its first-quarter free cash flow was negative $287 million and management expects free cash flow during 2018 to be between negative $4 billion and negative $3 billion. Indeed, it expects negative free cash flow for several more years, driven by its rapidly growing spending on original content. Strong member growth would help justify Netflix's wild spending.
