Netflix (NASDAQ: NFLX) reported what would normally be considered an explosive quarter after the market closed on Thursday. But these are not normal times. The company had a record number of second-quarter subscribers, making it the second-highest quarterly growth in Netflix history. Revenue also hit a record high, surpassing $ 6.1 billion, nearly 25% year-over-year and marking the first quarterly revenue topping the $ 6 billion milestone.
However, not everything was good. Netflix reported earnings per share (EPS) of $ 1.59, about 12% less than both management and analysts had anticipated. Shares initially fell as much as 8% on the news before recovering slightly and ending the day with a 6.5% drop.
This is one of those cases where things were not as bad as they seemed. To understand why, however, investors need to look beyond headline numbers as they don’t tell the whole story.
From left to right: Sadie Sink, Noah Schnapp, Millie Bobby Brown, Finn Wolfhard, and Caleb McLaughlin in a Netflix scene Strange things season three Image Source: Netflix
Big profits are lost, right?
Netflix reported EPS of $ 1.59 for the second quarter, and while that figure increased 165% year-over-year, it did not meet management’s forecast and analyst consensus estimates, which reached $ 1.81 per share.
However, Netflix reported two non-cash charges that came to the bottom line, making things look a lot worse than they really were. Management shared relevant details in the shareholder letter:
EPS of $ 1.59 vs. $ 0.60 a year ago included an unrealized loss of cash of $ 119 million [foreign currency] new measurement of our euro-denominated debt and a non-monetary valuation allowance of $ 220 million for deferred tax assets (due to recent legislation limiting the use of California [research and development] credits).
That adds up to $ 339 million in no cash charges. Netflix had around 454 million shares outstanding during the quarter, so those one-time adjustments reduced EPS to a sum of $ 0.75 per share, easily offsetting the “loss” of $ 0.22 per share.
Then there are those pesky exchange rates
Another factor that impacted Netflix’s bottom line was the strength of the US dollar. In times of uncertainty, for which the COVID-19 pandemic certainly qualifies, foreign investors flock to the security of the US dollar. As a result, many foreign currencies lose value, at least on paper, compared to the dollar. As Netflix derives an increasing portion of its revenue from international markets, this can cause a big change in net revenue.
That’s what happened during the second quarter when Netflix reported a currency loss of $ 289 million. The company said that average revenue per user (ARPU) grew just 0.4% year-over-year, but excluding the impact of exchange rates, ARPU grew 5%. These currency-related headwinds have nothing to do with Netflix’s strong demand for streaming services, but still affected the bottom line at approximately $ 0.64 per share. The company undoubtedly does everything possible to estimate the impact of exchange rates on results when it issues its guide, but it is important to remember that this is more art than science.
Joe Exotic in a scene from the Netflix original Tiger King: Murder, Chaos and Madness.
An understandably weak guide?
So far, the tech giant has had an exceptional year when it comes to subscriber growth. As the COVID-19 pandemic unfolded worldwide and blockades became the order of the day, people flocked to Netflix for its massive catalog of entertainment. The company added a record high of 16 million subscribers in the first quarter, followed by 10 million in the second quarter. That equates to a staggering 26 million new memberships paid so far in 2020. To put this in perspective, Netflix added 28 million to all of 2019.
However, management is concerned that the growth of the company in the first half of 2020 has been at the expense of the rest of the year. In the shareholder letter, Netflix said: “We expect net payment [additions] it will decrease year after year in the second half, as our strong performance in the first half probably fueled some demand in the second half of the year. ”
Netflix started its missive saying, “We live in uncertain times,” and that could be an understatement. Given the unprecedented situation, Netflix management is understandably conservative with its guidance, forecasting just 2.5 million new subscribers for the third quarter, down from the 6.8 million it added in the prior-year quarter.
To carry inverter
Given the fact that Netflix shares have gained 63% so far this year in their earnings report, it’s not surprising that some nearsighted investors are nervous at the prospect of “lost earnings” and the slowdown in the transmission growth. giant.
However, given the amount of moving parts that played in the bottom line and the stellar subscriber growth that Netflix has achieved so far this year, I’d say long-term investors simply have nothing to worry about.
