All eyes were on Netflix (NFLX +0.14%) in mid-July as the company reported the results of its second quarter. The company added 5.15 million new subscribers, down slightly from the prior-year period's growth, and well below the 6.2 million the company had forecast just last quarter. Revenue of $3.91 billion grew 40% year over year, though it also came in below expectations. Earnings per share of $0.85 grew 467% compared to the prior-year quarter, beating the $0.79 the company guided for.
There was much more detail in the company's shareholder letter and the quarterly earnings interview with analysts. Netflix executives discussed a number of topics of interest to investors, including its rare subscriber miss, the worldwide appeal of its international content, and beating HBO in Emmy nominations.
Image source: Netflix.
It's all about the subscribers
The most pressing question on the minds of many investors was about the rare shortfall of subscriber additions relative to the company's forecast. CFO David Wells addressed the issue, saying, "After four consecutive quarters of under-forecasting the business, we over-forecasted the business."
A review of the forecast compared to actual results in each of the previous four quarters shows that Netflix has indeed generally vastly underestimated the number of customers that would be joining the service, making this quarter a rare miss.
|
Period |
Q1 18 |
Q4 17 |
Q3 17 |
Q2 17 |
|---|---|---|---|---|
|
Forecast subscriber additions |
6.35 million |
6.30 million |
4.4 million |
3.2 million |
|
Actual subscribers additions |
7.41 million |
8.33 million |
5.3 million |
5.2 million |
|
Difference |
1.06 million |
2.03 million |
0.9 million |
2 million |
Data source: Netflix quarterly financial releases.
CEO Reed Hastings seemed unconcerned about the disparity, saying, "We've seen this movie of [second quarter] shortfall before -- about two years ago in 2016." He went on to say that the company was never able to pinpoint the exact reason for the difference, other than to say "there's some lumpiness in the business."
Wells added that historically, Netflix has seen seasonally weaker growth in the second and third quarters and he expects that pattern to play out this year.
Worldwide appeal
Netflix has been increasingly producing original content for the various international markets it serves. Chief Content Officer Ted Sarandos noted that in addition to being "incredibly relevant in their home territories," these shows are popular around the globe. He pointed to several examples, including Rain and Dark.
Rain was also called out in the shareholder letter, where it was described as a "Danish original thriller which became one of our biggest non-English original productions yet." Dark is a German original released in the fourth quarter of 2017 that did well in its home country, and, according to the company, "has also been viewed by millions of members in the US and has outsized watching throughout Europe and Latin America."
Last quarter, the company called attention to La Casa de Papel, a Spanish-language heist thriller (called Money Heist in English-language territories), which became the most-watched non-English series on Netflix ever.
The success of these foreign-language originals across a worldwide stage speaks to the quality of the programming and its ability to attract and retain members for Netflix.
Growing recognition
Netflix has only been producing original content for about five years, and recently achieved an unexpected feat. HBO has retained the title for taking home the most Emmy nominations for the past 17 years. In an upset this year, Netflix unseated the longtime champion, receiving 112 Emmy nominations to HBO's 108.
When asked about this on the call, Sarandos said that while he was thrilled by the achievement, there was another metric that he was even more pleased with: "The thing I was most proud of was we had 40 different shows nominated. To kind of give you an idea of the kind of different variety of things that we're doing: scripted, unscripted, comedy, drama, talk shows, everything across the board. Everyone was represented."
A blip on the radar
The most important takeaway from these comments is that the company continues to execute in all the ways that matter. The miss in subscriber numbers was rare for the streaming giant, and the massive outperformance in previous quarters is likely to return in the future.
At the same time, the breadth and quality of Netflix's growing body of global programming is a testament to the company's successful content strategy. It will likely continue to attract new subscribers (and reward investors) for years to come.
