Netflix, Inc. Sees Users And Costs Move Up In Second Quarter

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Netflix added 3.28 million streaming subscribers in the June quarter, which came in better than the estimates. However, the rising subscriber base, which comes from the ambitious international expansion do highlight the risks related to expansion and operating overseas.

More subscribers, less profits for Netflix

Netflix reported a 3.28 million bump in subscribers, well above its guidance of 2.5 million. On average, analysts expected the U.S. firm to add 3.14 million subscribers. On the other hand, profit was down 63% as costs spiked due to increased spending on buying and creating content. Also, the strong U.S. dollar depleted the revenue earned from overseas operations, says a report from the Wall Street Journal. Profit for the quarter came in at $26.3 million, or six cents a share versus 71 million, or 16 cents a share last year. Revenue climbed from $1.34 billion to $1.64 billion.

For the quarter, the streaming firm posted a negative free cash flow of $229 million compared to a negative $163 million in the last quarter. Despite this, the U.S. firm confirmed to continue with its originals strategy, noting that almost 90% of its subscribers have “engaged” with the original movies and shows.

During the conference call, Netflix Chief Executive Reed Hastings told investors that foreign markets may not start paying off right from the start, adding “How we do in the first year in a new market is not that determinate of the long-term.” Hastings said that we will have to wait for a couple of years to get a clear picture of the company’s standing in markets outside of the U.S.

Increased spending a necessity

Netflix, based in Los Gatos, California, plans to enter new countries such as Japan, Portugal, Italy and Spain by the end of this year. The firm recently concluded its first full quarters in Australia and New Zealand.

Netflix expects spending to hit $5 billion in 2016, and marketing expenses will be around $1 billion. Increased spending has become a necessary for the streaming firm, which faces competition from media companies such as Comcast, who plans to launch with a streaming service soon.

So far this year, Netflix shares have more than doubled, giving it a higher price-earnings ratio than 99% of American firms with a market cap over a billion, according to data from FactSet. On Wednesday, Netflix stock traded at a new price owing to the 7-for-1 stock split. At around 11.17 EDT Thursday, shares of the streaming firm were up 14.51% at $112.51.

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com

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