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Q3 Earnings Preview for Netflix

Netflix

The US big tech earnings will kick off with Netflix and Tesla after the US markets close on 18 October, which will be the morning of 19 October in the Asia-Pacific time zone. Amid the broad rebound on Wall Street in October, investors may be pricing in strong earnings results in the third quarter. Hence, their earnings results will be critical for market sentiment after a two-month slump in US tech stocks. Netflix’s user growth will be key parameters in its earnings reports. Below are the potential trends that the tech giant was brewing into and the potential impacts on its third-quarter earnings result.

Q2 review

In the second quarter, Netflix added 5.9 million new users, up 8% year on year, thanks to its password-sharing crackdown. However, the company did not give a breakdown of the user gain resulting from the changes in the ad-supported tier program and the paid password-sharing policy. While earnings per share beat markets’ expectations, reporting at $3.29, its revenue came to $8.19 billion, missing an estimated $8.3 billion. The annual revenue growth was only 3%, compared with growth of 8% in the prior year.

Netflix’s guidance for the third quarter is a 7% year-on-year revenue growth, and expected the user growth will be the same as the second quarter. Despite a flat growth expectation, the streamer believes its business momentum will “accelerate” in the fourth quarter amid the recent changes.

User and revenue growth are set to be flat

As mentioned above, the user gain from Netflix’s password-sharing crackdown and the revenue growth from the ad-supported tier will be the focus of the third-quarter earnings report. The company replaced the “basic” ad-free plan with a standard ad-supported plan at $6.99 a month late last year. The ad-free standard and premium plans are $15.49 and $19.99 per month, respectively. However, the password-sharing crackdown and the ad-supported tier will need to take time before seeing an acceleration in supporting the company’s growth. The tech giant said the paid sharing policy would be expanded to 100 countries, and “The cancel reaction was low and while we’re still in the early stages of monetization.”

A boost in free cash flow

Ironically, Netflix saw its free cash flow had been boosted due to the strikes by Hollywood writers and actors/actresses. The company raised its cash flow expectations to $5 billion from the previous estimate of $3.5 billion. Some analysts think its cash flow could overshoot the number, which indicates bigger opportunities for buybacks and investing in Mergers and Acquisitions (M&A). 

Q3 forecast by Bloomberg

Subscribers: 6.1 million

Earnings per share: $3.575, +15% annually

Revenue: $8.537 billion, + 7.7% annually


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