Testing the rally: Netflix beats on earnings but lowers guidance

This is exactly the scenario I’ve been worried about. Now let’s see how the market reacts tomorrow.

Today, after the market close, Netflix (NFLX) reported second quarter earnings of 85 cents a share that beat the consensus analyst projection of $79 cents. (The whisper earnings projection had climbed to 81 cents before the news. There’s a bit of an issue with the earnings since $85 million came from a foreign exchange gain. Without that gain, earnings were just 66 cents a share. It’s never quite clear what analysts have included in such one-time, non-core events in their estimates.)
That beat, though, was just about the end of the good news.

Revenue climbed 40.3% year over year but at $3.91 billion in came in below the $3.94 billion consensus estimate. Free cash flow was forecast at a negative $3 billion to a negative $4 billion for the full 2018 year–which would imply that cash spending on content will be weighted to the second half of the year.

Net global additions to subscribers were a disappointing 5.2 million, versus a forecast of 6.2 million. Net adds in the United States were just 700,000 against guidance for 1.2 million and last year’s second quarter record of 1.1 million.

Guidance for the third quarter was disappointing.  For the quarter the company forecast earnings of 68 cents a share, below the consensus of 71 cents a share on revenue of $3.988 billion. (Consensus revenue projection was $4.12 billion.) For global subscriber adds Netflix forecast 5 million against earlier estimates of 5.6 million. U.S. subscriber adds are expected to total just 650,000.

And it sounded like Netflix was expecting that the winds of global currency exchange rates would blow against the company for the third quarter. That would push operating margins to near the lower end of a 10% to 11% target range.

Initial reaction to the earnings and guidance has been negative in after-hours trading. The shares are down $57.03 as of 4:30 p.m. New York time or 14.23%, falling to $343.46 from $400.48 at the close.

It remains to see if tomorrow follows through on the disappointment.