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Netflix Posts Another Mixed Quarter Amid Tough Pandemic Comparisons

Netflix edged Wall Street forecasts for revenue and subscriber growth in the second quarter, but its earnings per share fell short of the company’s own outlook as well as that of analysts.

The streaming giant added 1.54 million global subscribers in the period to reach more than 209 million. Revenue came in at $7.34 billion, slightly higher than analysts’ consensus.

Earnings per share was $2.97 on a diluted basis, well short of the company’s forecast of $3.16 and the consensus from analysts of $3.14. In the year-ago quarter, EPS was $1.59 and revenue was $6.15 billion.

Shares in Netflix briefly tumbled 4% in after-hours trading before recovering. They had drifted down a fraction during the regular trading day. One downer for the stock was the company’s outlook for the third quarter. Netflix expects to add 3.5 million subscribers, a more modest growth level than previous third quarters.

While companies like to cite “tough comps” with prior-year periods, in the case of Netflix in 2020 and 2021, the description definitely applies. There was a massive “pull-forward” in the first half of 2020, when the onset of Covid-19 boosted subscriber levels by 26 million (equivalent to the total amount of new subscribers in all of 2019).

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Logically, then, it wasn’t a shocker when growth slowed markedly last quarter. Still, when the company reported first-quarter numbers in April, bears pounced on Netflix stock as the results fell dramatically short of expectations. As questions linger about the company’s path as Covid eases in much of the world this year, the company’s stock has been stuck in a narrow range over the past six months.

“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 wrote in its quarterly letter to shareholders. “In Q2 ’21, our engagement per member household was, as expected, down vs. those unprecedented levels but was still up 17% compared with a more comparable Q2 ’19. Similarly, retention continues to be strong and better than pre-Covid Q2’19 levels, even as average revenue per membership has grown 8% over this two-year period, demonstrating how much our members value Netflix and that as we improve our service we can charge a bit more.”

Translation: Our churn is low and getting lower, so expect some price hikes ahead (something Wall Street will cheer, even if some customers complain.)

In terms of territories, the company said the Asia-Pacific region accounted for about two-thirds of global paid net subscriber additions in the quarter. In the U.S. and Canada (reported since an accounting change a few quarters back as a single region, dubbed “UCAN”), the company shed about 400,000 paying customers compared with the first quarter. In the shareholder letter, the company described the downturn as something it expected. “We believe our large membership base in UCAN coupled with a seasonally smaller quarter for acquisition is the main reason for this dynamic,” the letter said.

In a section of the letter headed “Competition” — which has grown a bit longer in recent quarters — the company doesn’t address the influx of direct-to-consumer rivals such as Disney or HBO Max. Instead, it argues that it has a lot of room to continue growing as viewership keeps migrating from linear to digital.

“Streaming represents just 27% of U.S. TV screen time, compared with 63% for linear

television, according to Nielsen,” the company wrote. “Based on this same study, Nielsen estimates that we are just 7% of U.S. TV screen time. Considering that we are less mature in other countries and that this excludes mobile screens (where we believe our share of engagement is even lower), we are confident that we have a long runway for growth.”

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