Here’s what investors should look for in the Netflix earnings report
Netflix (NASDAQ: NFLX) is at the forefront of the transition to streaming entertainment, but slowing subscriber growth and lower than expected second-quarter earnings are worrying some investors. In this Backstage Pass video, which was broadcast September 29, 2021Motley Fool contributor Trevor Jennevine explains what to look for when Netflix releases its third quarter results later this month. Netflix is expected to release its results on October 19.
Trevor Jennevine: I’m willing to bet that all of our viewers have heard of Netflix, the pioneer and streaming media and still the industry leader. However, the stock has not been a market beater in the past year, up about 20%, 21%, while the S&P 500 is about 32%.
To put it a bit of context, in the last quarter, paid Netflix subscriptions amounted to 209 million, an increase of just 8%. I think the slowdown in growth as the pandemic is hopefully coming to an end, I think that has scared Wall Street a bit. Average monthly income per paid subscription, however, increased by 8%, to $ 11.67 – still worth considering.
The other numbers looked pretty solid now: $ 7.3 billion in revenue last quarter, up 19%. Earnings per share were $ 2.97, up 87%. One thing I didn’t particularly like was that free cash flow on a quarterly basis was negative again, but still positive over the past 12 months. Approximately $ 900 million in free cash flow over the past 12 months.
Looking at the third quarter, management is looking for sales of $ 7.5 billion, up about 16%. Slow down a bit on a sequential basis. Same thing with earnings per share at $ 2.55, up 47%. Then calling for a membership of 212.7 million, which again a bit slow – up 9%. So what I’m going to look at are all of these three settings.
First of all, the revenues, the earnings and most importantly the speed with which they increase their subscribers. In particular, I’ll be looking at some of the different geographies where the subscriber base isn’t as large. The United States has a fairly large subscriber base, but there is a lot of room to grow in places like Latin America and Asia-Pacific. I will look at the growth in the number of subscribers by geographic area. Next, pay attention to the average monthly income per subscription; this reflects the ability of Netflix to increase its prices. I think the company’s original content strategy gives it an edge. Or at least that’s the idea, it’s to produce content that only Netflix has and hopefully bring viewers to the platform. They produce a lot of good content. They just won 44 Emmys, I mean. They produce a lot of content and a lot of it is gaining traction with viewers. They have new versions all the time. They have The witcher coming in december. I think a lot of people are excited about it.
Then pay attention to free cash flow as well. Let’s see here. I misspoke earlier. The last 12 months free cash flow is $ 1.4 billion for Netflix. In the past 12 months, they have free cash flow of $ 1.4 billion. They turned into positive free cash flow in 2020. As I mentioned, in the last quarter, in particular, only on a quarterly basis, they generated negative free cash flow. I’ll see if it turns out.
It was one of the fears that many investors had about this business for a long time, that they would spend so much on content once the business is profitable or if they will generate positive free cash flow. It was nice to see this happen in 2020. Then any further comment they have up to compete in space with other players like [Walt Disney‘s] Disney +. Reed Hastings, as mentioned in the past, that they didn’t really see the impact of competition on Netflix’s business. But it’s always interesting to get management’s perspective on the industry’s competitive landscape.
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