Company attributes drop to Q2 content slate

Other highlights for the second quarter include the following:

• Operating income was $706 million, a 53% increase year-over-year.
• Operating margin was 1.3%, compared to 11.8% for Q2 2018.
• Net income for the quarter was $271 million, or diluted earnings per share of $0.60.
• At the end of Q2, Netflix had 151.6 million total streaming paid memberships, compared to 124.4 million for the same period last year.
• Despite the lower amount of net new additions, average streaming paid memberships grew 24% year-over-year and average revenue per user grew 3%.

In the shareholder letter, Netflix did not attribute the decline in net new additions to competition. Instead, they believe the content slate for the second quarter drew fewer new members than expected. Netflix does not believe this short-term blip will affect the company’s long-term goals.

“In prior quarters with over-forecasts, we’ve found that the underlying long-term growth was not affected and staying focused on the fundamentals of our business served us well,” said Netflix.

Second quarter content highlights include the debut of “Dead to Me,” which was watched by 30 million households in the first four weeks. Other popular shows were “When They See Us,” “Our Planet,” “Murder Mystery,” and “Always Be My Maybe.”

Netflix’s third quarter is starting off strong, with the release of season 3 of “Stranger Things” on July 4. According to Nielsen, episode one had an average audience of 19.2 million U.S. viewers over the first four days of its release. As a whole, the eight-episode season had a four-day average audience of 12.8 million viewers. The third quarter will also include new seasons of “La Casa de Papel” and “The Crown” and the final season of “Orange is the New Black.”

In its shareholder letter, Netflix addressed coming content changes, based on its licensing agreements with Disney who will be pulling Disney content, as well as programs like “Friends” and “The Office.” While Netflix is undoubtedly disappointed to lose these shows, they acknowledge this frees up money to spend on other programming.

The company also talked about other areas of investment, including an increase in marketing spending to build buzz around its original shows and a focus on licensing and brand partnerships with companies like Coke, Nike, Burger King and Baskin Robbins. A relationship with Netflix and AT&T will integrate Netflix into AT&T’s new set-top box.

Netflix acknowledged that Disney, Apple, WarnerMedia and NBCU will be among the services joining the streaming marketplace, and they said they have room for growth in the U.S. to get more watch time from subscribers. They want to retain their current subscription business model, too.

“We, like HBO, are advertising free. That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction,” Netflix said.

The company offered the following guidance for the third quarter:

• Revenue of $5.25 billion, representing 31.3% growth
• Paid net new additions of 7.0 million
• Operating income of $833 million
• Operating margin of 15.9%
• Net income of $470 million, or diluted earnings per share of $1.04

Insider Take:

One thing we really like about Netflix’s financial report is that they explain clearly and plainly what’s going on. They missed their membership forecast – by a lot – and they explained why, not in great detail but enough that you didn’t feel like they were trying to hide something. They also address why spending is increasing in certain areas, how competition affects them now and in the future, and their forecasts seem realistic. They also seem confident in their approach to content and viewer experience. They don’t include CEO quotes or other lofty statements that you have to interpret. It’s a simple, “here’s how we did” kind of report. You know where they are, where they are headed and why. We wish more companies would report this way. More facts and less smoke-and-mirrors.

Dana Neuts is Subscription Insider's Senior Staff Writer, covering our daily subscription news as well as member features, case studies, and reports.  

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