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Netflix Beats Q2 Estimates, Misses Subscriber Growth Outlook

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EPS beats estimate

Netflix (NFLX) reported its fiscal Q2 2018 financial results on July 16. Its non-GAAP EPS came in at $0.85, easily outpacing The Wall Street Journal’s estimate of $0.79. Moreover, EPS increased 466.7% year-over-year.

However, in aftermarket trading, Netflix stock took a nosedive, falling 14.1% to $343.89. The massive decline was because the company failed to meet its net subscriber addition guidance for the third quarter.

From the graph above, you can see Netflix’s EPS growth in the last five quarters. During that period, its bottom line grew at a CAGR (compound annual growth rate) of 54.3%. In the last two quarters, the company easily outpaced analysts’ estimates.

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Subscriber growth analysis

In the second quarter, Netflix added 5.2 million members against its guidance of 7.4 million. In the same period, it gained 0.7 million in the United States, which is short of the company’s projection of 2 million. International subscriber growth came in at 4.5 million, which was lower than the 5.5 million quarterly target.

Many video streaming players such as Amazon Prime (AMZN), HBO (TWX), and Hulu are investing heavily in original content, which is making the domestic market quite competitive. Amazon is also offering added benefits to its Prime members such as free delivery of goods. These headwinds are impacting Netflix’s customer additions.

Outlook

Netflix estimates that its EPS in fiscal Q3 2018 will be $0.68, while it expects its top line to grow 33.6% year-over-year to $4 billion. It projects total membership to be 135.1 million with a net addition of 5 million compared to 5.3 million in Q3 2017.

Netflix anticipates an operating margin of 10.5% in the third quarter, with the contribution margins for both the US and international markets at 37.8% and 14.7%, respectively.

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