Netflix surprised with better-than-expected on membership growth and revenue
According to a recent press release, the second quarter was better-than-expected on membership growth, and foreign exchange was worse-than-expected (stronger US dollar), resulting in 9% revenue growth.
Netflix challenge and opportunity is to accelerate the revenue and membership growth by continuing to improve the products, content, and marketing and to better monetize their big audience.
″We’re in a position of strength given our $30 billion-plus in revenue, $6 billion in operating profit last year, growing free cash flow and a strong balance sheet.″
Revenue in Q2 grew 9% year over year (or 13% excluding a -$339 million foreign currency impact), driven by a 6% and 2% increase in average paid memberships and ARM , respectively. Excluding the impact of foreign exchange (F/X), ARM rose 7% year over year.
The appreciation of the US dollar (USD) vs. most other currencies since April earnings report was the primary reason for the variance to the revenue guidance forecast. The company slightly under-forecasted global paid net adds in Q2 (-1.0m vs. -2.0m forecast and compared to +1.5m in the year ago quarter).
We’ve adjusted our cost structure for our current rate of revenue growth. This resulted in approximately $70 million of severance costs and an $80m non-cash impairment of certain real estate leases primarily related to rightsizing our office footprint.
Excluding these items totaling $150 million, and the F/X impact of the stronger US dollar since our April report, operating profit and operating margin were slightly ahead of our guidance forecast.
EPS of $3.20 vs. $2.97 a year ago exceeded initial guidance forecast of $3.00 due to a $305 million non-cash unrealized gain from F/X remeasurement on Euro denominated debt, which is recognized below operating income in “interest and other income.”
Approximately $5 billion of Euro bonds provides some natural hedge against the Euro for net income, but doesn’t affect operating income. Year to date, the gain from F/X remeasurement on our Euro debt is $467 million.
Q3 revenue growth forecast of 5% translates into 12% year over year revenue growth on a constant currency basis. Similarly, excluding the impact of currency, operating profit growth would be -3% year over year (vs our forecast decline of -29%) and operating margin would be 20% (vs our forecast of 16%).
Netflix forecasts paid net adds for Q3 of +1.0m vs. 4.4m in the year ago quarter and continue to expect full year 2022 operating margin of 19%-20%, excluding the unanticipated $150m of restructuring costs in Q2.