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Streaming giant Netflix reported better than expected second quarter earnings but missed on subscriber growth after the close Wednesday. For the first quarter in nearly a decade, the number of new subscribers in the U.S. fell. $NFLX shares slid more than 12% on the news.

NFLX Stranger Things 3

Stranger Things 3 Broke Records When it Premiered July 4

$NFLX has said it doesn't see Disney's new service Disney+ with content from Fox Networks, Disney, Pixar, Marvel and Star Wars hurting.

Netflix Inc NASDAQ: NFLX · Reported After Close Wednesday

$0.60 Beat $0.56 EPS AND $4.92B Missed $4.93B Billion Revenue Forecast

Earnings

Netflix (NFLX) reported Q2 2019 earnings per share of 60 cents, vs. 56 cents expected, per Refinitiv consensus estimate on revenue $4.92 billion vs. $4.93 billion expected, per Refinitiv.

  • Domestic paid subscriber additions: A loss of 126,000 vs. a gain of 352,000, forecast by FactSet
  • International paid subscriber additions: 2.83 million vs. 4.81 million, forecast by FactSet

Beginning with its Q4 report, Netflix has stopped providing guidance for free trial subscriber adds.

Netflix explained the missed here with its first-quarter subscriber growth was so strong that “there may have been more pull-forward effect than we realized.” The company also said in its letter to shareholders that the missed forecast was most pronounced in regions that saw price increases.

“Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated.”

Netflix Inc NASDAQ: NFLX

Market Reaction After hours $318.50 −43.94 (12.12%)

Competitors Heating Up

Walt Disney rolled out its much-awaited streaming service Disney+ last quarter, intensifying competition in the streaming arena. Armed with a huge repository of original content, gathered after the recent acquisition of the media assets of 21st Century Fox (FOX), Disney is all set to change the on-demand video streaming landscape.

Amazon (AMZN) Prime Video, AT&T (T) Time Warner, and Hulu have been ramping up their technical infrastructure and content portfolio, targeting a slice of Netflix’s market share.

“Questions have included expected announcements from Apple/Disney (as a possible reflection of future competition), pricing power vs. churn (impact on [long-term] margins vs. [short-term sub dynamics) and what content slate investments might yield against forward growth. Ahead of its earnings report, we think many of these fears are well understood by investors.” UBS analyst Eric Sheridan said last quarter (But Are they?)

Netflix Q2 2019 Earnings

Guidance

Netflix is projecting a stronger third quarter on the heels of heavy viewership of the third season of “Stranger Things.”

  • Netflix forecast 7 million global paid net adds for the next quarter and provided revenue guidance of $5.25 billion.
  • The company expects subscriber numbers will be boosted by its strong content slate in the third quarter, including the final season of “Orange is the New Black” and a new season of “The Crown.”

Stranger Things has had record viewership, in its official Twitter account, NFLX said, “40.7 million household accounts have been watching the show since its July 4 global launch — more than any other film or series in its first four days. And 18.2 million have already finished the entire season.” The previous season of the show had only about 15 million viewers in the first three days.

Netflix on Competition

Netflix acknowledged it will soon lose two of its most-watched shows, “The Office” and “Friends.”

NBCUniversal announced back in June it plans to remove “The Office” from Netflix in 2021 and move it to its own streaming service. Earlier this month, AT&T’s WarnerMedia announced its new streaming service, HBO Max, will include exclusive rights to stream “Friends” when it launches publicly in the spring of 2020. Netflix previously spent $80 million to keep “Friends” just through the end of this year, according to Vulture. Netflix said the loss of these shows is “freeing up budget for more original content.

Last quarter Netflix addressed the entrance of new streaming players like Apple and Disney in its letter to shareholders.

“We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings,” Netflix wrote, comparing the shift from linear viewing to streaming to that from broadcast to cable in the 1980s and 1990s. “We believe there is vast demand for watching great TV and movies and Netflix only satisfies a small portion of that demand.”

Cash Burn Update

The company maintained its free cash flow forecast for full-year 2019 of negative $3.5 billion and expects “improvement in 2020.” Beyond 2020, Netflix expects to reduce its free cash flow deficit as it grows its member base, revenue and operating margins. Netflix previously said 2019 would be its peak year for cash burn. It later revised that statement to say its cash flow would be consistent with the negative $3 billion of the prior year.;

Debt

Netflix said they plan to continue using high-yield debt to fund content investment in the meantime in the shareholder letter. The company has twice offered $2 billion in debt since October.

Netflix said it raised 10.5 year senior notes of 1.2 billion euros ($1.3 billion), 3.875% coupon, and $900 million, 5.375% coupon, in its latest round. 

Content Library and Costs

Walt Disney Co. $DIS has said it will pull its films off Netflix by 2020 end and launch it's own streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films.


Millarworld 1

Netflix has also made moves on this front with it's First Acquisition With Comic Publisher Millarworld. $NFLX planned to spend $7 billion on content in 2018.

Source: NetFlix, TradersCommunity, AlphaStreet

From The TradersCommunity Research Desk

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