Next week, Netflix (NASDAQ:NFLX) will report its third-quarter results. The main metric investors likely will be watching is the streaming-TV company's trends in domestic paid members. U.S. members unexpectedly fell sequentially in Q2. The decline was only slight -- but it was enough to prompt a sell-off in the stock price.
Investors, however, would do well to check on the company's trends in international subscribers as well. While international subscribers were up sharply year over year in Q2, highlighting the company's momentum in the metric from a 10,000-foot view, growth was slower than in previous quarters.
Can the company's international subscriber growth pick back up in Q3?
Netflix's growth in international members has slowed in more than one way. Viewed in terms of year-over-year growth, international subscriber growth decelerated meaningfully in Q2. Netflix's paid international members were up 34% year over year in Q2. This is down from 39% growth in Q1.
The slowdown was more evident by looking at the absolute number of international net paid members the company added during the quarter. This figure came in at 2.8 million, down from 7.9 million in Q1 and 4.6 million in the year-ago quarter.
Making Netflix's second-quarter international net member additions even more disappointing, the company had guided for 4.7 million new international paid members during Q2. The 2.8 million Netflix actually added, therefore, was well below management's guidance.
Management didn't seem to believe the suppressed member growth during the quarter was representative of any deep-rooted problems. Instead, the company cited a slightly negative impact from price increases and a greater-than-expected pull-forward of membership additions into the prior quarter. Further, management specifically noted that it didn't "believe competition was a factor since there wasn't a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region)."
What to expect in Q3
For the company's third quarter, management guided for international paid members to increase by 6.2 million, representing a significant sequential acceleration. This would notably be higher than the 5.1 million international members the company added in its third quarter of 2018.
Management's optimistic outlook suggests its international slowdown in Q2 was, indeed, just a short-term blip.
The company's confidence in its third-quarter net member additions comes on the heels of the success of Stranger Things season 3, which was released on July 4. In the company's second-quarter shareholder letter, management said the first few weeks of its third-quarter quarter were strong. In addition, management cited other new content that could help during the quarter, including "new seasons of La Casa de Papel (Money Heist), The Crown, and the final season of the iconic Orange is the New Black as well as big films like The Irishman from Martin Scorsese and action movie 6 Underground (directed by Michael Bay and starring Ryan Reynolds)."
Investors, of course, should keep the company's guidance methodology in mind. Instead of lowballing its guidance with a conservative figure the company can consistently beat, Netflix's forecasts aim for accuracy. This "means that in some quarters we will be high and other quarters low relative to our guidance," management said in its second-quarter update.
Still, if international subscriber growth once again comes in well below management's guidance, investors may want to take a closer look at the company's growth potential. If, on the other hand, international growth picks pack up, then perhaps management is right about its underwhelming second-quarter growth not being indicative of a larger problem.