Netflix Q2 Membership Growth Falls About 1 Million Short Of Forecast

Netflix added 5.2 million subscribers in the second quarter of 2018, about 1 million below its 6.2 million forecast, a shortfall that spooked investors Monday (July 16), with the company’s stock declining some 14 percent in after-hours trading. Netflix reported the net addition of nearly 5.2 million memberships of all types in the second quarter, nearly flat from Q2 2017. Paid net additions of memberships totaled about 5.5 million in the second quarter.

In a post-earnings interview posted on YouTube, Netflix executives didn’t sugarcoat the disappointment about membership growth. David Wells, the company’s CFO, said that after “four consecutive quarters of under-forecasting” membership growth, the second quarter came with an over-forecast.

“The underlying characteristics of the business have not changed,” he said. “We are still on track for strong growth this year.”

Netflix on Monday forecasted that, for the third quarter of 2018, the company will gain 5.5 million net additions to its membership, compared with 5.3 million for the same period last year. Paid net additions will reach 5.2 million, up from 5 million in the third quarter of 2017.

Revenue Gains

Overall, the company had a “strong but not stellar Q2, ending with 130 million memberships,” Netflix said in a letter to shareholders. “Earnings, margins, and revenue were all in-line with forecast and way up from prior year.”

For the quarter ended on June 30, Netflix reported a 40 percent year-over-year gain in revenue to $3.91 billion, lower than the $3.94 billion generally expected by analysts. Earnings per share stood at 85 cents, more than the 79 cents expected by analysts. Net income increased to $384 million, up from $66 million for the same period last year. The company’s operating margin in Q2 2018 was 11.8 percent, up from 4.6 percent for the same period in 2017.

Going forward, the company hopes to capture more revenue and membership growth from its investments in original films, including romantic comedies.

“As traditional exhibition focuses increasingly on superheroes and sequels, our on-demand service allows us to serve a wide variety of tastes,” the company said in the letter. Wells said during the post-earnings interview that fuller results from those original movies will probably take “another year,” given the relatively long lead and product times for such content.

Foreign Growth

Foreign-language originals and content made for consumers in India also represents areas of optimism for Netflix in the near term, company executives said on the post-earning interview. Internationally, the number of net membership additions increased 8 percent year over year in Q2, Netflix said.

In India, Netflix is in its early days of market penetration, according to officials on the post-earnings interview. Though the country shows promise for growth, Netflix will likely have to figure out how to appeal to different demographics and consumer segments, given India’s famous complexity.