Scheduled to report its second-quarter results after market close on Wednesday, Netflix (NFLX -9.09%) has a high bar to live up to. The company added a record number of subscribers in its first quarter, easily beating analysts' estimates for the key metric. Combining this recent strong quarter with robust guidance from management for Q2, there's good reason for investors to expect solid execution from Netflix during the period.
As usual, one key metric to watch in the streaming-TV company's quarterly update will be its growth in members during the quarter. As the lifeblood of Netflix's business model, it's important for this number to keep rising. But how many member additions should investors expect from Netflix in Q2?
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Growth in paid members
In its first-quarter shareholder letter, management guided for net paid member additions of five million in Q2. This would bring total paid memberships to about 154 million, up approximately 24% year over year.
While this figure is well below the record 9.6 million members Netflix added in its first quarter of 2019, it's not far below the 5.45 million the company added in its second quarter of 2018. Notably, the significant sequential deceleration in member additions shouldn't worry investors, as it is a natural byproduct of the seasonality of Netflix's business. The company also saved some of its popular releases, namely the third season of Stranger Things, for the beginning of its third quarter. So, Q2 lacked the big titles that help drive outsize member growth.
Highlighting Netflix's international momentum, management's guidance calls for 4.7 million net member additions internationally and 300,000 in the U.S.
While Netflix outperforms its guidance for member growth more often than it reports a figure below the forecast, it's still important for investors to realize that it's management's policy to strive for accuracy -- not conservatism -- in its forecasts. In other words, Netflix doesn't lowball its guidance. This means management's guidance may be investors' best reference point for what to realistically expect from the metric.
Revenue growth could steal the show
Even though Netflix's guidance for a 24% increase in paid memberships during its second quarter signals a deceleration in member growth compared to the 25% growth seen in Q1, management expects revenue growth to accelerate significantly. The company guided for second-quarter revenue to rise 26% year over year -- an acceleration compared to 22% growth in Q1. This is due to the expected impact of higher average revenue per user (ARPU) in Q2 thanks to the company's recent price increases.
Boosting revenue during the quarter will be a meaningful price increase in the U.S. In January, Netflix said it would start rolling out price hikes for its domestic plans that would increase the price of its various plans in the key market anywhere from 13% to 18%, depending on the subscription plan. Most of these price hikes are expected to occur during Q2, as existing customers were grandfathered into the increases over a three-month period. In addition, Netflix was also raising prices in Brazil, Mexico, and parts of Europe during the quarter.
The streaming-TV company will report its results after market close on July 17.
