Following a big 2018 run-up, investors are in an unforgiving mood regarding Netflix's (NFLX) subscriber miss.
After the bell on Monday, Netflix reported Q2 revenue of $3.91 billion (up 40% annually) and GAAP EPS of $0.85. Revenue missed a $3.94 billion consensus; EPS, benefiting from a $0.15, non-cash, currency gain related to a Eurobond, beat a $0.79 consensus.
More importantly, Netflix reported that it added 5.15 million streaming subscribers in Q2 (670,000 in the U.S., and 4.47 million in international markets), less than guidance of 6.2 million. In addition, the company guided for five million Q3 subscriber adds (650,000 U.S., 4.35 million international), which is below an analyst consensus of roughly six million.
This column has been updated to include takeaways from Netflix's earnings interview.
By comparison, Netflix easily topped its Q1 subscriber guidance in April, reporting 7.41 million streaming adds after having previously guided for 6.35 million.
As of the time of this article, shares are down 14.2% in after-hours trading to $343.64. They're still up about 80% on the year. Here are some takeaways from Netflix's report:
1. High penetration rates in the U.S. and certain other developed markets are likely weighing on subscriber growth a bit.
With the company claiming 57.4 million U.S. streaming subs at the end of Q2, Netflix now has well over half of all broadband-connected U.S. households signed up for its services. That arguably provides some context for recent European pricing tests that (if broadly rolled out) would likely cut down on password-sharing.
2. The fact that Q2 featured a relatively weak slate of original content launches may have also weighed on subscriber adds.
With a stronger slate of launches due towards year's end, and with Q4 typically Netflix's strongest quarter for subscriber adds, subscription growth could pick up later this year.
3. Though subscriber adds missed, pricing trends remain good.
With the help of price hikes and (presumably) a stronger mix of costlier subscription plans, Netflix's average selling price (ASP) rose 14% annually in Q2, topping Q1's 12% growth. International ASP rose 14% on a forex-neutral basis, which is slightly better than Q1's 13% growth.
4. As is the case for other U.S. multinationals, the dollar's recent rally is starting to weigh on Netflix.
The company got a smaller-than-expected $65 million international revenue boost from currency swings in Q2, and blames forex for the fact that it now expects its 2018 operating margin "to be near the lower end" of a guidance range of 10% to 11%.
5. For now, Netflix is maintaining its 2018 free cash flow (FCF) guidance of negative $3 billion to negative $4 billion.
Netflix only burned $847 million over the first two quarters of the year, but says its cash content spend will be weighted towards the second half. Many analysts have expected full-year FCF to be closer to negative $3 billion than negative $4 billion.
6. Netflix once more sounds upbeat about its bundling deals with telcos and pay-TV providers.
The company notes new deals were inked in Q2 with Telefonica (TEF) (Spain) and KDDI (Japan), and asserts bundles "continue to be a high-performing additional acquisition channel." Existing bundling partners include T-Mobile US (TMUS) , Comcast (CMCSA) and Altice.
7. Netflix's debt balance continues to grow, as the company keeps tapping debt markets to finance its big content investments.
The company ended Q2 with $8.3 billion in long-term debt, partly offset by $3.9 billion in cash.
8. Engagement continues to grow.
During Netflix's earnings interview, CEO Reed Hastings indicated Netflix's median viewing rate is still growing. And (not surprisingly) he remained upbeat about Netflix's ability to further grow per-user viewing activity.
9. Netflix didn't revise its content budget.
The company's prior guidance for 2018 content spend of $7.5 billion to $8 billion on a profit-and-loss basis (it could be over $12 billion on a cash basis) wasn't updated. During the earnings interview, CFO David Wells reiterated that Netflix plans to continue growing its content spend in the coming years, but didn't share any numbers.
10. Most of Netflix's (considerable) marketing spend is focused on promoting originals.
Wells suggested on the interview that around 80% to 85% of Netflix's marketing spend is "oriented around building title brands," and that only a small percentage is related to direct subscriber acquisition. Netflix's marketing spend rose 92% annually on a GAAP basis last quarter to $526.8 million, and the company has guided for full-year marketing spend to grow 56% to $2 billion.
TheStreet's Eric Jhonsa previously covered Netflix's Q2 report and earnings interview through a live blog.