Netflix Missed Q2 Earnings Target Despite Increased Subscribers
Netflix, Inc (NASDAQ: NFLX) share price tumbles after the media streaming giant failed to meet its earnings and guidance projected for the second quarter of 2021, according to its financial statement and second quarter (Q2) guidance.
Analysis of the media company’s financial statement shows that despite hitting subscriber and revenue expectations, Netflix falls short on its earnings and guidance, and share sheds 3.28%.
Shares of Netflix fell 3.28% as the market reacted to mixed Q2 earnings, missing on earnings and falling short of guidance expectations but slightly exceeding revenue forecasts.
The content platform reported earnings per share of $2.97 compared to the $3.16 analysts were expecting, on revenues of $7.34 billion versus expectations of $7.32 billion.
Global paid subscriber additions came in at 1.54 million, up 11% to finish the quarter with 109 million paid memberships, compared to the 1.19 million people expected to sign on in that time.
COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through. We continue to focus on improving our service for our members and bringing them the best stories from around the world, the company said.
Netflix is coming off a pandemic-fuelled bumper crop of new subscribers, but other media companies jumping onto the streaming train are making for some heavy competition in the market.
The company also gave lacklustre Q3 subscriber guidance, expecting to add around 3.5 million in the third quarter, much lower than the 5.5 million that investors were hoping for.
Netflix subscriber slowdown in Q1
One of the key questions regarding Netflix has always been whether the streaming giant would be able to maintain its subscriber growth as competition from new streaming services and other forms of entertainment grows – which it has done exponentially, especially during the last year while we’ve all been trapped at home.
Well, investors finally have a hint, and it’s not looking good. In the first quarter of 2021, Netflix reported earnings per share of $3.75 compared to $2.79 expected, and revenue was up 24% from the same period last year at $7.16 billion compared to $7.13 analysts expected.
So far so good, but the kicker was the weak 3.98 million new global subscribers versus the 6.2 million expected by analysts, and its own 6 million forecasts.
The company said that the slowdown in subscribers could be attributed to the ongoing pandemic, which forced the delay and shut down many of its big name films and shows.
“We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays,” Netflix said in its letter to shareholders.
Production was interrupted in 2020 by pandemic fallout, but the company was able to sustain itself (and its desperately bored viewers at home) with projects it had completed before lockdown, like the wildly popular Bridgerton. So it’s only now having an effect.
The company had also attributed its 2020 boom to the pandemic: around this time last year the company won 16 million new subscribers in just three months, and thanks to Covid the streaming service had $1.9 billion in positive free cash flow at the end of 2020, and in its last earnings said that it hoped to break even on a cash flow basis within 2021.
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The good news is, Netflix expects its content to pick up again in the second half of the year. Production is back up and running in most of its main markets, and if all goes to plan the company will spend over $17 billion in cash on content this year.
In a letter sent to shareholders, Netflix said, “As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report. For Q3’2021, we forecast paid net additions of 3.5m as against 2.2m in the prior-year period.
“If we achieve our forecast, we will have added more than 54m paid net ads over the past 24 months or 27m on an annualized basis over that time period, which is consistent with our pre-COVID annual rate of net additions.
“We forecast that average revenue per membership (ARM) will grow roughly 5% year over year on a FX neutral basis in Q3’2021.
“We continue to target a 20% operating margin for the full year 2021 against 18% in 2020. After our big global launch in January 2016, we committed to steadily growing our operating margin thereafter at an average rate of three percentage points per year over any few-year period.
“Some years we’ll be a little over (like in 2020), some years a little under (like in 2021). Assuming we achieve our margin target this year, we will have quintupled our operating margin in the last five years and are tracking ahead of this average annual three percentage point pace”.
The media giant also said the company is still very much in the early days of the transition from linear to on-demand consumption of entertainment.
“Streaming represents just 27% of US TV screen time, compared with 63% for linear television, according to Nielsen. Based on this same study, Nielsen estimates that we are just 7% of US TV screen time.
“Considering that we are less mature in other countries and that this excludes mobile screens (where we believe our share of engagement is even lower), we are confident that we have a long runway for growth.
“As we improve our service, our goal is to continue to increase our share of screen time in the US and around the world”, Netflix told shareholders.
Africa Market
The streaming company said it recently expanded its low-cost mobile-only plan to an additional 78 countries across South East Asia and sub-Saharan Africa.
“Like in our other markets, this plan complements our existing three tiers of service”, the management told shareholders in a statement posted on its website.
Netflix said, “In the five markets where we had previously launched a mobile-only plan, we have found that the mobile only plan has been an effective way to introduce more consumers to Netflix while being roughly revenue neutral as the lower average revenue per membership is offset by incremental acquisition and generally better retention”.
Netflix Missed Q2 Earnings Target Despite Increased Subscribers
