Netflix is typically the first major tech firm to report its quarterly earnings, and given that we’re into July, it’s only natural for analysts to start looking toward that second quarter report. Now one analyst says his second quarter Netflix survey could indicate that the company’s U.S. performance was weak, but he adds that investors might not care about that anyway.
Netflix survey points to softness
In a note to investors dated July 5, Baird analyst William Power said his Netflix survey of 3,000 respondents in the U.S. suggests that once again, the company may have had a soft second quarter. He noted that his first quarter Netflix survey also pointed to weakness in the U.S., as did his surveys for last year’s second and third quarters.
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The survey measures subscriber penetration, and Power found a 42.9% penetration rate in the U.S. during the second quarter, a significant decline from the 50.8% measured in the first quarter. He notes that usually, the first quarter is the strongest due to seasonality, but he adds that the magnitude of the quarter over quarter decline in U.S. penetration is bigger than he’s seen in the past.
Focus on international results
The analyst also ponders whether weakness in the U.S. would really matter because of how focused investors have been on the company’s international expansion. He does still expect international to be the main investor focus again with the second quarter earnings release. As a result, if Netflix posts strong international results, investors might forgive weak U.S. results. However, he adds that in the long-term, if U.S. results continue to flatten, it could be harder for Netflix to hit the high end of its U.S. subscriber target range, which is 60 million to 90 million.
For the second quarter, he’s forecasting 2.6 million international net adds, versus 3.5 million in the first quarter and 1.5 million in last year’s second quarter. He’s looking for 600,000 U.S. net adds, $2.8 billion in revenue and 15 cents per share in adjusted earnings. Netflix is scheduled to release its second quarter earnings report on July 17 after closing bell.
Netflix benefits from Twitter mentions
Power is actually surprised at the results of his Netflix survey, given the critical acclaim for the company’s new original series 13 Reasons Why. He also noted that Netflix released new seasons of House of Cards and Orange is the New Black as well, and early reviews for Glow have been strong as well.
Jefferies analyst John Janeis recently wrote an interesting report about viral content and how Netflix benefits from social media. In a note to investors on June 28, he considered whether Twitter mentions of Netflix originals could be a leading indicator that one or more of them might be close to cancellation, specifically as it relates to Sense8 and The Get Down.
He explained that with most multi-year Netflix shows, Twitter mentions rise in the second season. However, these two shows were exceptions to that rule, as was Girlboss, which was canceled after the first season and also generated a lot fewer Twitter mentions in the first month compared to the company’s other new shows.
The Jefferies analyst also noted that with Netflix, the social media conversation is weighted more upfront than shows on regular TV, which he said was a function of the ability to binge-watch the shows. He believes that the streaming video provider benefits from this because a sudden surge in social media activity close to a new show’s launch provides big momentum to carry them from the gate. He also believes that social media activity could help drive more subscribers to sample Netflix.
He did find that the peak in social media activity for some Netflix’s most popular original shows was delayed, which he believes suggests that the audience for the shows grew over time. He placed Stranger Things and Making a Murderer in this category. This demonstrates a flexibility he feels regular TV lacks.
Janedis warned that based on social media activity, House of Cards and Orange is the New Black were both showing signs of aging during the second quarter. This is interesting in light of Baird’s more recent Netflix survey and lends itself to Janedis’ argument for social media as a leading indicator for Netflix content.
The Jefferies analyst said that total Twitter mentions in the first week after the fifth season of House of Cards launched fell 72%, while mentions in the first week after the fifth season of Orange is the New Black launched declined 44%. Looking at it on a 90-day basis, he added that the fourth season of Orange is the New Black saw “a similar number” of Twitter mentions relative to The Walking Dead and Game of Thrones. The fourth season of House of Cards actually came up short. If he is correct about Twitter mentions of Netflix shows, then he may have found an earlier sign that subscribers are tiring of these shows even before Baird’s Netflix survey.
Shares of Netflix closed down 0.92% at $146.25 on Thursday.