Netflix (NFLX 1.74%) stock took a rare hit on Tuesday, falling about 5%. The decline followed the company's second-quarter earnings release. Lower-than-expected net member additions during the quarter spooked some investors. Of course, there was more to the quarter than the company's headline-grabbing miss on subscriber growth. Indeed, operating profit, margin, and revenue all climbed rapidly on a year-over-year basis.
Furthermore, there was other information worth investors' time in Netflix's second-quarter earnings call following the release of its quarterly shareholder letter. Two areas that were particularly interesting were management's plans to improve the TV experience and deal with growing competition. Of course, management also provided some commentary on its over-forecasted member growth for the quarter.
Netflix Originals. Image source: Netflix.
Stop worrying about Netflix's subscriber miss
Before we tackle some other commentary from the earnings call, Netflix CFO David Wells addressed the elephant in the room: 5.2 million net member additions during the quarter compared to management's guidance for 6.2 million additions.
First, Wells reminded investors that the company strives for accuracy in its forecast -- not conservatism. This approach to guidance, therefore, is bound to deliver some misses every now and then.
"We clearly didn't pad the number," Wells said.
But Wells also noted that the worse-than-expected growth didn't change management's view of its business.
But we think based on the rolling 12 months of growth that we've had compared to the prior rolling 12 months of growth, U.S. up slightly, internationally up significantly, that the background and underlying characteristics of the business haven't changed. Our total addressable market is intact and hasn't really changed based on those 90 days of actuals.
The health of Netflix's subscriber growth is also easily evident by looking at total members today -- 130 million, versus 104 million just one year ago.
Netflix's growth story is intact.
Netflix wants a much better TV product
When asked about what is on management's agenda this year and over the long haul, Netflix chief product officer Greg Peters said "it's a long, long list," but he did expand on one area that management is currently focused on: the Netflix experience on TV.
With all of this amazing content that we are bringing out, we've been working really hard over the last several months and quarters even, testing and researching, how do we make that TV experience faster, more fun, easier to find the stories that our members will love?
Some changes for TV will roll out this week, but Peters said he expects "a long line of incremental improvements that make that experience even greater for finding the stories that you love."
Focusing on the customer -- not the competition
As competition ramps up in the streaming TV space, Netflix CEO Reed Hastings and chief content officer Ted Sarandos provided some context on how the company plans to continue growing its business amid heightened competition. It boils down to a relentless focus on the customer.
"Our focus is on doing the best content we've ever done," Hastings said. "Having the best user interface, the best recommendations, the best marketing, all the things that we've been doing for many years in the past and will keep doing for many years in the future."
Sarandos added:
And [as far as] our programming, we've always been focused on keeping people entertained and satisfied on an absolute basis not relative to any competitor. So, really by keeping an eye on our members and our consumers, we better serve them than hyper-focusing on competition.
Overall, Netflix's second-quarter earnings call provided a glimpse of a company executing shrewdly, with great optimism about the company's future. The call offered a refreshing reminder that zeroing in on quarter-to-quarter member growth won't provide investors useful long-term context. Investors should zoom out and stay focused on Netflix's longer-term growth trends and management's strategies to remain a leader in the streaming TV space.
