Netflix reports 'strong but not stellar' 5.2M new customers in Q2

Netflix, Youtube
Netflix reported increased revenue in its second quarter. (iStock)

Netflix turned in better key numbers in its second quarter than it did in its first, but almost all of those numbers were lower than the company predicted.

The company reported revenue of $3.9 billion in the second quarter, up from $2.78 billion in the same period a year ago, and also up sequentially from the $3.7 billion it reported in the immediately preceding first quarter. Netflix's operating income in the second quarter was $462 million, up from $128 million a year ago, and also up from $447 million last quarter.

Operating margin was a bit off from the last quarter. It was 11.8% in the second quarter, compared with 12.1% in the first quarter. That was still better—far better—than the 4.6% margins Netflix reported in the second quarter a year ago.

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Netflix called its performance “strong but not stellar.”

The company led with its subscriber numbers, reporting that it ended the second quarter with 130 million memberships. That represented an increase of 5.2 million memberships, the same as the second quarter last year, but lower than the company forecast of 6.2 million.

The weakness was in the United States, where the company added 700,000 U.S. subscribers—good by historical measure, but not what was expected. The company had expected to beat the record number of 1.2 million adds in the first quarter.

Of course, the company touted the quality of its content and its record number of Emmy nominations. “In addition to succeeding commercially, we are starting to lead artistically in some categories, with our creators earning enough Emmy nominations this year to collectively break HBO’s amazing 17-year run,” the company wrote.

Netflix noted that HBO and Disney are looking to become more competitive with it and YouTube, as are Apple and Amazon. Netflix confidently asserted that with such wide-ranging consumer appetite for programs, there’s plenty of room in the market for more content providers.

Most investors worried over Netflix's rare miss, and what it might mean for the company's future. "The company’s results and Q3 guidance proved to be meaningfully worse than expected in both domestic and international markets," wrote the analysts at Wall Street research firm Barlays. "Also, Q3 subscriber growth guidance is also lower than Q2, which is quite unusual. NFLX did not attribute the performance to anything specific other than to effectively imply that its modeling based on the trailing 12 months may have caused an overestimation of subscriber trends. While we can see how this could have distorted Q2, it would also imply that the company’s consequent adjustment for Q3 could make that conservative."

Concluded the Barclays analysts: "While the quarter is obviously disappointing, we believe the story continues to have enough drivers to keep the longterm trajectory intact. The company’s wholesale distribution deals globally, cadence of content for the rest of the year and beyond, increasing localization in major markets such as India, pricing power as well as structural tailwinds in the form of consumption pattern changes and broadband penetration continue to drive the story longer term."

Interestingly, Netflix's Reed Hastings also addressed the net neutrality topic during his company's quarterly earnings call. He said that that net neutrality is now a "consumer expectation," as noted by Variety, and therefore he's not concerned the the U.S. government has moved away from guidelines enforcing the concept. 

Article updated July 17 with additional information and commentary.

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