The share price of streaming giant Netflix, Inc. (NASDAQ:NFLX) fell 10.3% to US$325 on Thursday following the release of its second quarter earnings report after the close of trade on Wednesday.
What happened in the June 2019 quarter?
Netflix reported a 26.0% rise in revenue to US$4.9 billion, which was in line with the consensus estimate from analysts. Operating income surged 52.8% to US$706 million as the company's operating margin expanded 250 basis points to 14.3%. Diluted earnings per share fell 29.4% to US$0.60 but ended up beating the consensus estimate of US$0.56.
Cash flow continues to be a concern with Netflix reporting negative free cash flow of US$594 million for the quarter and is forecasting negative free cash flow of around US$3.5 billion for the full year in 2019.
However, the metric that really captured the market's attention and caused the sell-off was the significant miss in subscriber growth. On a net basis, Netflix added 2.7 million paid memberships for the quarter which was 46% below its forecast of 5.0 million. Management noted that the missed forecast occurred across all regions, but slightly more so in the regions where Netflix had increased prices.
The missed forecast was attributed to a number of factors, including the content slate for the quarter that drove less growth in paid net adds than initially anticipated, and a large first quarter (9.6 million net adds), which might have resulted in a pull-forward effect. Furthermore, the company recorded a small fall in US subscribers with paid memberships declining from 60.23 million in the March quarter to 60.10 million in June.
Outlook
Netflix has guided for revenue to grow 31.3% to US$5.3 billion for the September quarter with diluted earnings per share expected to increase by 16.9% to US$1.04. Moreover, the company has forecast for paid net additions to rise by 7.0 million, which would bring the total amount of global streaming paid memberships to 158.56 million.
Management also acknowledged the expected increase in competition in the streaming space with major services from Disney and AT&T among others in the pipeline. This remains something for investors to pay close attention to as the market continues to move away from linear television to streaming entertainment.
