Netflix Reports Earnings on Tuesday: 7 Key Things to Watch For - TheStreet

Thanks to a subscriber miss and a tech correction, Netflix  (NFLX) - Get Report  is going into the company's Q3 report down roughly 15% from where it traded prior to the Q2 report.

That might make it a little easier for the streaming giant, whose shares are still up about 75% on the year, to get a favorable reaction to its Q3 numbers, which arrive after the close on Tuesday. An "earnings interview" will be hosted at 6 p.m. ET. 

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

On average, analysts polled by FactSet expect Netflix to report Q3 revenue of $4 billion (up 34% annually) and GAAP EPS of $0.68. For Q4 -- Netflix provides quarterly guidance within its shareholder letters -- the consensus is for revenue of $4.23 billion (up 29%) and EPS of $0.50.

However, Netflix's subscriber figures and guidance generally have a much bigger impact on how its stock moves post-earnings. In July, Reed Hastings's company guided for 5 million Q3 streaming net subscriber adds -- 650,000 in the U.S. and 4.35 million in international markets -- falling short of a pre-earnings consensus of about 6 million. For seasonally big Q4, the analyst consensus is for 1.6 million U.S. and 6.1 million international net adds.

In addition to the subscriber numbers, here are a few other things for investors to watch for as Netflix reports and hosts its earnings interview.

1. Comments on the Impact of Second-Half Originals Launches

A relatively light slate of high-profile originals may have contributed to Netflix's Q2 subscriber miss. With the company having a more loaded content slate for the back half of 2018 -- at this point, naming individual titles from the full list of high-profile original shows and movies being rolled out each quarter seems almost quaint -- it's worth paying attention to any comments about the impact of this slate on subscriber adds, whether in the U.S. or overseas.

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2. ASP Growth

Netflix's average selling price (ASP) rose 12% annually in Q1, and 14% in Q2. Price hikes helped here, as did an improving mix of HD and 4K subscription plans.

Odds are good that Netflix once more saw double-digit ASP growth in Q3. However, the dollar's 2018 gains against many foreign currencies may have dented international ASP increases a little.

3. 2019 Content Spending Plans

Though it had announced a 2018 content budget by the summer of 2017 (it would later be revised higher), Netflix hasn't yet shared a content budget for 2019. Will that change on Tuesday?

In July, Netflix reiterated that it plans to spend $7.5 billion to $8 billion on content this year on a profit-and-loss basis (on a cash basis, spending might be above $12 billion). The company added it plans to further up its content spend in the coming year, but didn't provide details.

4. Cash-Flow Guidance

Another thing Netflix reiterated in July was that it expects 2018 free cash flow (FCF) of negative $3 billion to negative $4 billion. The reiteration was made even though cash burn during the first two quarters of 2018 totaled only $847 million.

Management defended its cash flow guidance reiteration by noting this year's cash content spend will be weighted towards the second half. However, with Netflix's full-year FCF consensus now at negative $3.02 billion, many analysts are expecting cash burn to at least be near the low end of the company's guidance range.

5. Signs of Additional Asian Progress

Netflix's penetration rates within many of the Asian markets it entered in 2015 and early 2016 still appear to be fairly low. Moreover, competition in some of these markets is intense: Amazon.com (AMZN) - Get Report and Hulu each have a large presence in Japan, and Amazon and Fox's Hotstar service are formidable rivals in India.

However, with the help of investments in local-language content, including originals such as Korean adventure film Okja and Indian crime thriller Sacred Games, Netflix has gained a solid foothold in a slew of Asian markets. The company doesn't break out its international subscriber growth by region, but does sometimes offer comments on its progress in various countries.

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6. Stats About User Engagement

Netflix's management doesn't always break out new stats about user engagement in its earnings report or interview, but when it does, it's worth paying attention. In April 2017, Hastings disclosed weekly Netflix viewing has topped one billion hours. Three months ago, he mentioned Netflix's median per-user viewing rate continues to grow, but didn't share details.

7. Comments on the Impact of Higher Interest Rates

As many readers probably know, interest rates have been moving higher in recent weeks. That impacts Netflix's finances a bit: The company had a modest $4.4 billion in net debt (debt minus cash) as of June, but is still burning cash and has stressed it's comfortable tapping debt markets to cover additional cash outflows in the coming years, as it pushes ahead with its ambitious content-spending plans.

Look for management to get a question or two during the earnings interview about what (if any) effect the recent uptick in interest rates is having on their debt-raising plans. While it's unlikely that Netflix would fully upend its capital-raising strategy, it could adjust its near-term plans a little.