Netflix earnings will show whether price hikes are paying off

Kamaron Leach, Bloomberg News

What to Watch for in Netflix's Second-Quarter Results

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Netflix Inc.’s (NFLX.O) earnings should help answer a key question for the streaming giant: whether customers are willing to pay more in an increasingly competitive market.

After boosting prices in markets around the world, the company will deliver its second-quarter results on Wednesday afternoon. Analysts don’t expect much growth at home -- they’re predicting a mere 309,240 subscriber additions in the U.S. on average -- but the hope is that the increases and more users overseas will let Netflix sustain the expansion investors have come to expect.

“Recent price increases in multiple countries should result in revenue acceleration starting this quarter,” Citigroup Inc. analyst Mark May said in a research note.

Wall Street is projecting revenue of US$4.93 billion for the period, up 26 per cent. Analysts also will be closely watching the growth in average revenue per user, international profitability, domestic streaming contribution margins and user engagement.

Netflix is the dominant paid video streaming service, but it has reason to shore up its position right now. Walt Disney Co., AT&T Inc.’s WarnerMedia and Comcast Corp.’s NBCUniversal are all racing to deliver their own online services, ushering in a new era of intense competition.

Against that backdrop, Netflix is building its presence overseas. The company is expected to report the addition of 4.75 million subscribers internationally in the second quarter, according to analyst data compiled by Bloomberg.

Shares in the company have risen 37 per cent this year, nearly double the gain of the S&P 500. But it’s still unclear how many customers globally are willing to pay for its product. Greg Peters, the company’s chief product officer, has hinted at the need for a lower-priced subscription tier for users with less disposable income.

Things should get more interesting for Netflix in the second half. On the plus side, the Los Gatos, California-based company will get a boost from new seasons of “Stranger Things” and “Orange Is the New Black.” Earlier this month, “Stranger Things” got off to a record start, with 40 million household accounts watching in the first four days of the new season.

But Disney’s highly anticipated US$6.99-a-month streaming service, called Disney+, arrives in November. Though no one is expecting a large-scale defection from Netflix to Disney+, it should shake up the industry.

What Bloomberg Intelligence Says:

The price increases should accelerate 2Q average revenue per unit and revenue gains, even as operating margin isn’t expected to improve until 2H with a 13 per cent target for the full year.-- Geetha Ranganathan, senior media analyst-- Click here for the research

The Numbers

2Q streaming paid net change est. +5.06 million (Bloomberg data)
- 2Q U.S. streaming paid net change estimate +309,240
- 2Q international streaming paid net change estimate +4.75 million
2Q revenue est. US$4.93 billion (range US$4.89 billion to US$4.98 billion)
2Q GAAP EPS est. 56c (range 52c to 65c)
3Q revenue estimate US$5.25 billion (range US$4.96 billion to US$5.52 billion)
3Q GAAP EPS estimate US$1.04 (range 63c to US$1.39)

Data