Netflix Reports Q2 Earnings on Thursday: 3 Keys to Watch

Netflix earnings are Thursday and investors are looking for a continuation of the strong subscriber trends reported in the first quarter.

With earnings season soon underway, investors are eager to see if Netflix  (NFLX) - Get Report can deliver another blowout quarter. 

TheStreet will be live blogging Netflix's second-quarter earnings after the close on July 16. Please check our home page then for more details.

The streaming giant reported, by far, its biggest quarter ever in terms of new subscriber growth -- the key metric that tends to drive its stock price. Owing to COVID-19 lockdowns, Netflix more than doubled its initial subscriber guidance for the first quarter, reporting 15.77 million new paying subscribers. 

The company cautioned that its subscriber growth will decelerate as lockdowns ease, guiding for 7.5 million new subscribers in Q2. But with COVID-19 still on the rise in the U.S. and elsewhere, that forecast could again prove too conservative. 

"Given the tailwinds we saw in Q2 from the lockdown and increased streaming, I think we’d be looking for a positive surprise to that guidance. The question is whether it’s going to be as huge as in Q1," said Tuna Amobi, analyst at CFRA Research. 

Here are a few things to watch for when Netflix releases its second quarter earnings after the close on Thursday July 16.

1. International Growth 

Wall Street's current consensus is for 8.58 million new subscribers added in the second quarter, reflecting high expectations heading into earnings. According to a Monday note from RBC Capital Markets analyst Mark Mahaney, Netflix is a "clear structural winner" from COVID-19 in the U.S., and surveys during Q2 suggest a strong showing in Mexico as well, with Netflix subscribers reporting high levels of satisfaction in the service.

"By our count, Netflix has ~130 new non-English Local Language Originals (LLOs) slated for 2020 and beyond, 3x more than Amazon," Mahaney wrote. "LLOs claimed 4 of 5 most watched shows on Netflix in our Mexico survey." Netflix only recently began breaking out subscriber metrics per region, and with international markets viewed as key to Netflix's future success, international trends for Q2 should be revealing. 

2. Free Cash Flow

in its 2019 full-year updatecash flow is steadily improving owing to its "growing operating margin and profits,". Apart from subscriber growth, Netflix's Q1 release contained another pleasant surprise for investors: better-than-expected free cash flow. The company said that it will burn $1 billion or less in 2020, mostly due to delays in production. It finished 2019 with $3.3 billion in negative free cash flow, but said in its 2019 full-year update that cash flow is steadily improving owing to its "growing operating margin and profits." 

"We’ll be looking for any reaffirmation or update on that and use that as an indication of how soon the company will go to free cash flow positive," Amobi added. The company cautioned in its first quarter letter that it won't be a straight line to free cash flow profitability, however, and that investors should expect some "lumpiness" in that metric owing to the timing of productions. 

 3. Forward-Looking Guidance

In its first quarter report, which came out just a few weeks into the COVID-19 pandemic, Netflix said that its guidance of 7.5 million new subscribers was "mostly guesswork" owing to the uncertain trajectory of the pandemic. Three months later, the timing of the pandemic is no more certain, but Netflix management may reveal more about trends they're seeing and expecting in terms of subscriber growth and engagement. 

Right now, Wall Street is expecting 5.5 million new subscribers in the third quarter, followed by 6.5 million in the fourth quarter. One outstanding question related to the second half, according to Amobi, is how much of the subscriber gains in Q2 were a "pull forward" from the second half, which could potentially worsen the outlook for Q3 and Q4. Expect management to add color on the trends they're seeing in their subscriber base, and what it could mean for the second half.