Netflix Q3 Earnings Preview: A Subscriber Numbers Story

Netflix, Inc. NFLX shares tumbled following its second-quarter earnings report in July, and with third-quarter results scheduled to be released Tuesday, investors are highly anticipating the print, according to Bloomberg Intelligence's Paul Sweeney.

What Happened

Netflix's earnings reports are always high-profile given the stock's strong gains over the years, Sweeney said on Bloomberg TV Friday. The main focus of the earnings report remains the same as it has been in recent quarters, he said: the net subscriber addition number.

"That is really the metric investors focus on for this name, as opposed to EPS or even revenue." 

Netflix guided for the addition of 5 million net subscribers in the quarter, and this figure is reasonable to match if not beat, Sweeney said. In Q2, the company missed on this "very important metric," he said. 

Why It's Important

Netflix is spending more than $8 billion in programming this year, a number that's "dramatically" higher than last year and expected to move even higher in 2019, Sweeney said. Without the free cash flow to fund its expenses, Netflix needs to tap the debt market, he said. 

Current expectations call for negative free cash flow of $3 billion in 2018, but the Netflix can continue operating in this manner as long as it grows its subscriber base in Q3 and beyond, he said.  

Goldman Sees Positive Cash Flow In 2022

Netflix is expected to show a total net subscriber addition of 5.55 million users, with 0.85 million of those originating from the U.S. and the remaining 4.7 million from international markets, Goldman Sachs' Heath Terry said in a Friday note. 

The better-than-expected subscriber expectations can be attributed to the company's investments in marketing; newer distribution partners; the ongoing development of early stage international markets; and a strong content slate, the analyst said. 

Netflix's full year 2018 cash flow burn should grow from $2 billion one year ago to $3.3 billion, Terry said. Over time, the ratio of cash content spend to content amortization to relieve working capital pressures will improve, and by 2022 the company should be cash flow positive, he said. 

Netflix's need to raise debt has "generated headlines," but the financial impact of each 100-basis point increase in cost of incremental debt would only result in a 1.5-percent hit to 2020 net income, according to Goldman Sachs. 

Terry maintains a Buy rating on Netflix with a price target lowered from $470 to $430 to reflect the contraction in Goldman Sachs' broader internet multiples.

Related Links:

Wall Street's Reaction To Netflix's Q2 Earnings Report

Citi's May Says Buy The Dip In Netflix

Photo courtesy of Netflix.