Netflix beats on paid subscriber growth, but misses earnings expectations

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Shares of Netflix recovered from an initial dip and were up nearly 1% after the bell Tuesday after the company reported earnings that missed on the bottom line. The company’s revenue slightly beat estimates, and it confirmed speculation that it will expand more into gaming.

Here’s what the company reported versus expectations:

  • Earnings per share (EPS): $2.97 vs $3.16 expected, according to Refinitiv survey of analysts
  • Revenue: $7.34 billion vs $7.32 billion expected, according to Refinitiv
  • Global paid net subscriber additions: 1.54 million vs 1.19 million expected, according to Street Account

Analysts hadn’t been expecting a blockbuster quarter when it comes to subscriber adds, expecting 1.19 million users according to Street Account. The company said it added 1.54 million users to finish the quarter with over 209 million paid memberships.

“COVID has created some lumpiness in our membership growth (higher growth in 2020, slower growth this year), which is working its way through. We continue to focus on improving our service for our members and bringing them the best stories from around the world,” the company said in a letter to investors.

Netflix said its revenue growth this past quarter came from an 11% increase in average paid streaming memberships and 8% growth in average revenue per membership.

Most eyes were on what Netflix anticipates for its third quarter. Netflix said it expects 3.5 million net adds, while investors had anticipated 5.46 million net subscriber additions in the third quarter, according to Street Account data. Much of the optimism comes from Netflix’s upcoming slate of content, as a large amount had been pushed back into the second half of this year and next year.

In the first half of this year, Netflix said it has spent $8 billion in cash on content and expects content amortization to be around $12 billion for the full year.

“If we achieve our forecast, we will have added more than 54m paid net adds over the past 24 months or 27m on an annualized basis over that time period, which is consistent with our pre-COVID annual rate of net additions,” the company said.

The company also confirmed it was pushing into the gaming space. Netflix said it views gaming as a new content category, comparing it to its expansion into original films, animation and unscripted TV.

Potential games will be included in Netflix subscriptions at no additional cost, the company said. Initially, the focus will be on mobile games.

“We’re excited as ever about our movies and TV series offering and we expect a long runway of increasing investment and growth across all of our existing content categories, but since we are nearly a decade into our push into original programming, we think the time is right to learn more about how our members value games,” the company said.

The company recently hired video-game executive Mike Verdu from Facebook , where he was vice president of augmented reality and virtual reality content, as the company makes a deeper push into gaming.

However, Netflix won’t be relying on features, like gaming or consumer goods, to generate a separate profit pool, co-CEO Reed Hastings said on the company’s earnings presentation . Instead, the focus is on making the core streaming service better, he said.

Chief Operating Officer Greg Peters added on the presentation that Netflix will be able to differentiate its gaming offerings because of its vast bank of intellectual property.

“We are in the business of making these amazing worlds and great story lines and incredible characters, and we know the fans of those stories want to go deeper, they want to engage further,” Peters said.

Right now, the focus for the company is on experimenting and seeing what works, he added.

Netflix is also facing pressure from tough year-over-year comparisons, since last year consumers were in the midst of the Covid-19 pandemic and spent much more of their time online and in need of entertainment.

Netflix said that in its second quarter, its engagement per member household was down compared to last year, but was still up 17% compared with the second quarter of 2019.

“The pandemic has created unusual choppiness in our growth and distorts year-over-year comparisons as acquisition and engagement per member household spiked in the early months of COVID,” the company reported.

Netflix has continued to hold its own in the growing streaming wars. But as companies continue to launch their own direct-to-consumer services, some are choosing to join forces. Certain mergers could put pressure on the company.

“Certainly Disney buying Fox helps Disney become more of a general entertainment service rather than just a kids and family service,” Hastings said. “Time Warner, Discovery , if that goes through , that helps some, but it’s not as significant I would say, as Disney and Fox.”

Correction: This story has been updated with the correct global paid subscriber net additions estimate from Street Account.

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