Netflix's (NASDAQ: NFLX) second-quarter update proved to be an interesting one. Net paid member additions were much worse than expected, yet revenue growth accelerated significantly. This dynamic of a high-profile miss that sparked a sell-off in the stock price, and the streaming-TV company's strong financial performance has given shareholders a lot to mull over.
Following the earnings release and a drop in the company's share price, investors may want to review Netflix's second-quarter earnings call, where management provided more insight into the streaming giant's recent performance.
Here are several key takeaways from the call.
Image source: Getty Images.
The primary reason for weak subscriber growth
With Netflix's U.S. subscribers declining for the first time in Q2, albeit very slightly from 60.2 million in Q1 to 60.1 million in Q2, it's fair for investors to wonder if the company is running into meaningful pushback against its recent price increases, or if subscribers are switching to other streaming services. After all, U.S. subscribers were hit with a price increase during Q2.
But Netflix management argues that though price increases played a role in some subscriber churn, it wasn't the main reason for the weaker-than-expected performance in paid members.
"[W]e think the primary story [regarding our worse-than-expected paid member growth] was around seasonality and timing in nature of our content slate," said Netflix vice president of finance Spencer Wang.
Growth is accelerating
Netflix management thinks the company's recent top-line performance offers a reason for investors to be optimistic.
"I would just also point out that revenue growth did accelerate by 400 basis points in Q2 versus Q1," Wang said when addressing one analyst's question about whether slower global subscriber growth could be a sign that the company is approaching maturity earlier than expected. "If you look at our guidance as well for Q3, I think you'll see that trend continue as well. So financially, I think that's actually a sign that things are picking up or continue to grow very steadily."
Netflix's second-quarter revenue growth was, indeed, impressive. Its top line rose 26% year over year, up from 22% growth in Q1. For its third quarter, management expects revenue to rise 31% year over year.
Understanding Netflix's partnership strategy
One area of growth for Netflix recently has been the company's increasing investment in partnerships, particularly its deals with partners to bundle Netflix into their services.
Bundles with pay TV and mobile operators help Netflix tap into incremental opportunity, accelerating the company's growth, explained Netflix chief product officer Greg Peters during the call. This is because these bundles give the company access "a user population that may not be as tech-forward as the folks who sign up with us directly, they may not have a smart TV connected to the Internet in their home," Peters said. These are the type of customers who may not own over-the-top connected TV devices like Amazon's Fire TV or Apple's Apple TV, but may have an internet-connected set-top box through their pay TV provider. Bundling Netflix for these users and making it seamless for them has been a successful strategy so far.
Though these partnerships only represent a minority of Netflix's overall member acquisitions, Peters believes there's "tons of opportunity" on this front. In addition, Netflix plans to "add more and more partnerships" around the world.
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