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Netflix Second-Quarter Earnings Live Blog

Real Money's Eric Jhonsa covers Netflix's second-quarter earnings report and video interview with management.

Three months after Netflix  (NFLX) - Get Report missed subscriber estimates and offered light guidance, investors in the streaming giant are looking to find a stronger set of numbers in its second-quarter shareholder letter.

Among analysts polled by FactSet, the consensus is for Netflix to report 1.15 million paid net subscriber additions in the quarter, above its April guidance of 1 million. 

For the third quarter, which is set to feature a stronger content slate, the consensus is for Netflix to guide for 5.63 million paid net additions.

Netflix Report Might Disappoint. But Maybe Not...: Real Money's Guilfoyle

Netflix is forecast to report GAAP earnings per share of $3.18 and second-quarter revenue of $7.32 billion, up 19% from a year earlier. But the subscriber numbers typically have a bigger impact on how the Los Gatos, Calif., streaming giant's stock moves post-earnings.

Real Money tech columnist Eric Jhonsa will be breaking down Netflix's second-quarter shareholder letter, which is expected to arrive after the bell, as well as a "video interview" with management that's set to be released at 6 p.m. U.S. Eastern.

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7:02 PM ET: That's a wrap for Netflix's video interview. Shares are up 0.8% after hours to $535.50 after the company beat its Q2 paid net add guidance and issued below-consensus Q3 net add guidance. Free cash flow guidance was reiterated, and $500M worth of stock buybacks were disclosed.

Netflix also confirmed that it plans to start bundling games with its subscriptions, with the company's initial efforts in the field centered around mobile gaming. During the interview, COO Greg Peters added that Netflix will in part look to develop games based on its IP and indicated that the company could eventually offer games for other devices.

Thanks for joining us.

6:58 PM ET: Sarandos with some closing remarks. Says Netflix is pleased to still be growing subs and revenue. Declares Netflix is focused on 3 things: Its content, its choosing and driving conversation around the world.

6:55 PM ET: Question about how Netflix evaluates potential acquisitions.

IR/corporate development chief Spencer Wang: We explore many ways to accelerate growth, including M&A. We're open to buying content assets that can help us grow, such as IP or content libraries. But some of these assets are heavily encumbered and can't be used the way we want to. We're also mindful of the opportunity cost for making a given M&A transaction.

Sarandos: A deal has to be right in the middle of the strategic core of what we're doing.

6:52 PM ET: Question about what Netflix's rationale is for keeping gross debt in the $10B-$15B range as FCF grows in the coming years.

Neumann: We want to keep some debt on the balance sheet so that we maintain some familiarity with capital markets. The most important thing for us is to invest strategically in the business. But as we generate excess cash, we'll return it. We spent $500M on buybacks in Q2. Our debt/EBITDA ratio is down to 2.5x from 5x previously.

6:49 PM: Question to Sarandos about whether he sees any merit to what Amazon (recently obtained exclusive Thursday Night NFL rights) is doing in sports.

Sarandos: I'm not sure if they're looking for the same thing from their content spend that we are.

6:47 PM ET: Question about whether Netflix could invest in niche sports content.

Sarandos: I don't know if those sports suffer from being under-distributed. I won't say "never say never" regarding sports, but the question is, what's the best use of $10 billion, which is what it would cost to be a meaningful player in sports. There aren't a lot of natural synergies, except that sports is shown on TV.

6:45 PM ET: Question about sports. Does Netflix see itself becoming a key destination for sports-related content?

Sarandos: We've been successful with sports-adjacent content such as documentaries (Drive to Survive, The Last Dance, etc.). We'll continue to roll out such content. 

6:43 PM ET: Question about how Netflix will measure the financial success of its gaming efforts.

Peters: We're thinking about this as a core part of our subscription offering. If we deliver more value, it ultimately benefits subscriber retention and acquisition.

6:41 PM ET: Question about whether Netflix could expand its gaming efforts to other screens/platforms over time.

Peters: We think mobile is a great platform for games. It's very mature, has a great developer community, etc. Mobile will be a primary focus for us. But ultimately, we see all the devices we currently serve as platforms we could deliver gaming experiences to. We're going to keep innovating in that space. We're going to try a bunch of different games, and see what works. Part of this will be games that extend our IP, but we'll also try standalone games. Maybe someday, we'll see a game that spawns a film or TV series. We'll also do game licensing. There's a big prize here, and we plan to use the playbook that's worked for us in the past.

6:36 PM ET: Question about Netflix's gaming efforts and how it plans to generally appeal to gamers.

Peters: We see this as an extension of our core entertainment offering. Just as we've expanded into new genres, unscripted content, etc., we think we have an opportunity to add games. It's a multi-year effort, we'll start relatively small. We'll make adjustments based on what we see is working. We think we can differentiate with the help of our IP. We know the fans of our stories want to engage further, and games are an avenue for that. We also feel our subscription model allows to avoid showing ads or including in-game purchases, and just provide entertaining games. We think that appeals to a lot of game developers.

6:32 PM ET: Question about recent Netflix moves to expand beyond streaming into gaming, podcasts, live entertainment, etc. Which of these fields could create a meaningful profit pool?

Hastings (laughing): I would say none of them. But these are things that our customers love and enhance our overall service. Also, there are "supporting elements" such as consumer products to help create buzz around our content brands. They aren't large profit generators, but play a useful role.

6:29 PM ET: Question about why 3 percentage point margin growth has been the right cadence for Netflix.

Hastings: If we'd aimed for 2 or 4-point growth, I think we would've ended up in the same place. The big prize is keeping revenue growth at 20%. The more we do, the more we're learning. 

6:26 PM ET: The most profitable TV networks traditionally did 40% EBIT margins at their peak. How does Netflix see its long-term margin?

Neuman (grinning): I'm definitely providing long-term margin guidance. What's most important is to "grow healthy." Making strategic investments in the business while growing profits. Our op. margins have been grow by 3 percentage points per year. That rate won't last forever, but we do have a good runway for growing revenue and margins.

6:23 PM ET: Question about how competition impacts how Netflix thinks about long-term pricing.

Peters: We already compete with many entertainment options. We feel that if we're offering a good value proposition to consumers around the well, we can go back to them and ask for a little more, so that we can deliver more to them.

Sarandos: We've already been competing for viewing time with many of our streaming rivals who have been consolidating, just through different channels. The scale of Netflix's audience and distribution platform helps us differentiate.

Hastings: Disney buying Fox helped Disney become more of a general entertainment provider. Warner Media buying Discovery does the same for them, but not to the same extent. We're still focused on making the right content investments and improving the service. There's also a lot of competition from social media, sports, etc.

Sarandos: The big question is when media mergers lead to 1 + 1 equaling 3 or 4. Most of these deals are 1 + 1 = 2.

6:17 PM ET: Question about the impact of lower-ARPU markets on Netflix's global ARPU going forward.

COO Greg Peters: We're thinking hard about how to best address consumer needs in both more affluent markets and emerging markets. The trick in the latter is to appeal to a broader base of consumers without cannibalizing more expensive plans. The goal is to increase total revenue.

6:15 PM ET: Question about what makes Netflix's core business a great investment in the coming years.

Hastings: We're a secular Internet play. People underestimated what the Internet could do in the past. And this is the Internet applied to entertainment. As we grow revenue, margins will grow. And as we generate cash flows, we'll return cash flows through buybacks. 

Neumann: There are 800M-900M broadband and pay-TV households outside of China. We think we can be in most of those households in time. Our Asia-Pac penetration rates are still pretty low, and streaming still has a lot of viewing share to gain from linear TV. Our business scales well -- it's about creating content from anywhere to anywhere.

Sarandos: Streaming has changed how people consume content. So much award-winning content is coming out on streaming services

6:09 PM ET: Question about Netflix's ability to get back to pre-COVID net add levels in 2022.

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Neumann: The long-term growth pattern for our business is "remarkably consistent." On a 2-year basis, our 2020/2021 net adds should be comparable to our 2018/2019 net adds. We expect to end the year on "a much more normalized growth trajectory."

Reed Hastings: It's pretty unlikely that Internet streaming will slow down. For at least the next several years, the growth story for streaming is very much intact. We're not seeing major headwinds from new streaming competition. Streaming overall remains a growth story, and that will continue until streaming is 50, 60, 70% of viewing.

6:07 PM ET: Question about Q3 guidance.

Neumann: The Q3 guide reflects a lot of what we saw in Q2. On the margin, user acquisition is still impacted by COVID, with subscriber adds rising in pandemic-impacted markets and impacted by reopenings. But the impacts are diminishing.

6:05 PM: First question is about Q1 net adds coming in above expectations.

CFO Spence Neumann: The quarter played out pretty much as expected. There's still a bit of choppiness to our growth, following 2020's subscriber pull-forward and the push-out of some content launches. Churn is down relative to Q2 2019, and engagement is up. What we hope is we're near the tail end of this COVID choppiness.

Co-CEO Ted Sarandos: More content is coming out now. We're still seeing good engagement for new originals. Our content slate is pretty back-weighted this year.

6:03 PM ET: Here's the interview link.

6:02 PM ET: The interview is up. As was the case for Q1, this quarter's interviewer is Fidelity's Nidhi Gupta.

5:55 PM ET: Shares are close to where they were an hour ago, up 0.2% AH to $532.11.

5:54 PM ET: Hi. I'm back to cover Netflix's Q2 video interview, which should be made available in a few minutes.

5:02 PM ET: I'm taking a break, but will be back to cover Netflix's earnings interview, which is set to go up on YouTube at 6PM ET.

Shares are up 0.6% to $534.00 after Netflix reported 1.54M Q2 paid streaming net adds (above a 1.15M consensus) and guided for 3.5M Q3 paid net adds (below a 5.63M consensus). The company also reiterated its full-year FCF guidance and confirmed reports that it plans to expand into gaming, while stating it will start off by launching mobile games.

4:54 PM ET: Netflix on the rollout of its mobile-only plans in emerging markets: "We recently expanded our 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. 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."

4:52 PM ET: Netflix has erased its AH losses: Shares are now up 1% to $536.49.

4:50 PM ET: Against a backdrop of reopenings, Netflix spent $604M on marketing in Q2, up 39% Y/Y. Technology and development (R&D) spend rose 24% to $537.3M, and G&A spend rose 21% to $334.8M.

4:48 PM ET: Reed Hastings has long argued that Netflix sees itself competing not only against other subscription streaming platforms for screen time, but also against games, social media, YouTube and other digital entertainment options. In that context, expanding into games serves to open up another front in that battle.

4:41 PM ET: The gaming comments come after media reports indicated Netflix was planning an expansion into gaming, and also after Netflix hired gaming industry vet Mike Verdu to be its VP of game development.

4:39 PM ET: Netflix on its budding gaming efforts: "We view gaming as another new content category for us, similar to our expansion into original films, animation and unscripted TV. Games will be included in members’ Netflix subscription at no additional cost similar to films and series. Initially, we’ll be primarily focused on games for mobile devices."

4:37 PM ET: As usual, Netflix shared some viewing stats for new original content. The number of "member households" that watched the following movies and shows during their first 28 days of availability:

Army of the Dead - 75M
Sweet Tooth - 60M
Shadow and Bone - 55M
Season 2 of Too Hot to Handle - 29M
Part Two of Lupin - 54M
Season 4 of Elite - 37M
Fatherhood - 74M
The Mitchells vs. the Machines - 53M

4:33 PM ET: Streaming content obligations totaled $21.9B at the end of Q2, up $1.2B Q/Q and $2.8B Y/Y.

4:31 PM ET: On a cash basis, Netflix's content spend totaled $4.4B in Q2 (that weighed on FCF). That brought YTD cash content spend up to nearly $8B.

4:28 PM ET: Netflix's weekly paid net adds in 2021 and in recent years. The company reiterates its stance that the pandemic pulled forward subscriber adds in 2020 that otherwise would've occurred later.

NFLX weekly paid net adds

4:24 PM ET: Netflix on its M&A stance in the wake of the Warner Media/Discovery and Amazon/MGM deals: "While we are continually evaluating opportunities, we don’t view any assets as “must-have” and we haven’t yet found any large scale ones to be sufficiently compelling to act upon."

4:22 PM ET: Netflix is now down 1.5% AH. With the stock having gone into earnings down slightly on the year, markets are for now taking the light Q3 paid net add guidance in stride.

4:20 PM ET: To reinforce its long-standing argument that it still has a lot of room to gain screen time from other entertainment options, Netflix shared this Nielsen chart stating it has just a 7% share of U.S. TV viewing time.

NFLX Q2 streaming time

4:16 PM ET: On a constant-currency basis, U.S./Canada drove most of Netflix's ARPU growth, thanks to a fresh round of price hikes. But on a dollar basis, EMEA and Asia-Pac also saw healthy ARPU growth thanks to forex swings.

4:15 PM ET: Netflix's Q2 paid net add and ARPU growth by region. As expected by the company, U.S./Canada paid net adds were negative. Also, EMEA only saw 190K paid net adds. Asia-Pac (1.02M paid net adds) was a relative strong point.

NFLX Q2 regions

4:11 PM ET: Q2 free cash flow was negative $175M. Netflix reiterates full-year guidance for roughly breakeven FCF, and also that it believes it no longer needs external financing.

4:09 PM ET: Netflix has pared its slightly: It's now down 3% AH to $515.50. Roku is down 1.1% AH.

4:07 PM : Average revenue per membership rose 8% Y/Y in dollars and 4% in constant currency. That compares with 6% dollar-based growth and 5% growth in CC in Q1.

4:05 PM ET: Netflix: "The pandemic has created unusual choppiness in our growth and distorts year-over-year comparisons as acquisition and engagement per member household spiked in the early months of COVID. In Q2’21, our engagement per member household was, as expected, down vs. those unprecedented levels but was still up 17% compared with a more comparable Q2’19."

4:04 PM ET: Here's the shareholder letter, for those interested.

4:03 PM ET: Revenue of $7.34B (+19% Y/Y) slightly tops a $7.32B consensus. GAAP EPS of $2.97 is below a $3.18 consensus.

4:02 PM: For Q3, Netflix forecasts 3.5M paid net adds, below a consensus of 5.63M. Shares are down 4.7% after hours.

4:01 PM ET: The letter is out. Netflix reports 1.54M Q2 paid streaming net adds, above guidance of 1M and a FactSet consensus of 1.15M.

4:00 PM ET: The Q2 shareholder letter should be out shortly.

3:58 PM ET: Netflix's stock is heading into the close down 0.3%, amid a 1.6% gain for the Nasdaq.

3:56 PM ET: Some things to keep an eye on within Netflix's report aside from its subscriber numbers: Regional subscriber growth, ARPU growth, and any general commentary shared about Netflix's paid net expectations for the second half of the year, which features a stronger original content slate than the first half.

3:53 PM ET: Netflix's stock is down 1% YTD going into earnings (this compares with a 13% Nasdaq gain). Shares tumbled in April after the company missed Q1 paid net estimates and issued light guidance, but have recovered some of their losses since.

3:50 PM ET: The FactSet consensus is for Netflix to post 1.15M paid net streaming adds for Q2, and to guide for 5.63M Q3 paid net adds. The revenue consensus is at $7.32B, and the EPS consensus is at $3.18

3:47 PM ET: Hi. I'll be live-blogging Netflix's Q2 report (due after the bell) and its earnings interview (set to arrive at 6PM ET).