This week is not off to a good start for Netflix. On Monday, the streaming video on demand pioneer reported its second quarter financials. While the report was strong, Netflix (NASDAQ: NFLX) said in a letter to shareholders that the quarter was ‘not stellar.’ The biggest difference between actual versus forecast figures was in the membership category. Membership grew by 5.2 million to 130 million members, but this was lower than the 6.2 million new members forecast for the quarter. Netflix said it fell short because it had over-forecast global additions and acquisition growth was slower than expected.

‘Earnings, margins and revenue were all in-line with forecast and way up from prior year. Internet video is growing globally and we are fortunate to be one of the leaders,’ said Netflix in its shareholder letter. ‘In addition to succeeding commercially, we are starting to lead artistically in some categories with our creators earning enough Emmy nominations this year to collectively break HBO’s amazing 17-year run.’

Other highlights for the second quarter include:

• Total revenue was $3.91 billion, a 40.3 percent increase year-over-year.
• Streaming revenue was $3.8 billion, a 42.8 percent increase year-over-year.
• U.S. streaming revenue was $1.89 million. International streaming revenue was $1.92 million.
• Operating income was $462 million.
• Operating margin was 11.8 percent.
• Net income was $384 million, or $0.85 diluted earnings per share.
• Total memberships are 130.1 million with 124.4 million of those being paid memberships.

Operational highlights include:

• Debuted sci-fi action series Lost in Space which has been renewed for a second season
• Released second season of 13 Reasons Why, one of Netflix’s most popular originals
• Released new seasons of Santa Clarita Diet, A Series of Unfortunate Events, Marvel’s Jessica Jones, La Casa de Papel, GLOW and Marvel’s Luke Case
• Boss Baby: Back in Business is one of Netflix’s biggest series for kids
• Debuted non-English originals including 3%, The Rain and Sacred Games
• Netflix received 112 Emmy nominations including five best series and best limited series nominations across 40 different scripted and unscripted series, movies, limited series, documentaries, talk shows, comedy specials and kids’ series

Netflix said it is continuing to invest in the mobile experience for subscribers, including the release of its new Smart Downloads feature for Android users. With this feature, subscribers can download an episode of their favorite Netflix series. Once they’ve watched the episode, it is deleted from their device and the next episode is downloaded.

In terms of competition, Netflix said it anticipates more competition in the streaming video space with YouTube, HBO, Disney, Amazon, Apple, AT&T/Warner Media and others promising to bring new content.

‘We believe that consumer appetite for great content is broad and that there is room for multiple parties to have attractive offerings,’ We anticipate more competition from the combined AT&T/Warner Media, from the combined Fox/Disney or Fox/Comcast as well as from international players like Germany’s ProSieben and Salto in France. Our strategy is to simply keep improving, as we’ve been doing every year in the past,’ said Netflix.

For the third quarter of 2018, Netflix is forecasting the following:

• Total revenue of $3.99 billion, a 33.6 percent increase year-over-year
• Streaming revenue of $3.9 billion, a 35.75 percent increase year-over-year
• Operating income of $420 million
• Operating margin of 10.5 percent
• Net income of $307 million, or $0.68 diluted earnings per share
• Global net additions of 5.0 million with 0.65 million in the U.S. and 4.35 million internationally.

Despite the significant growth in every category, except membership, investors were not pleased with the earnings report. Their reaction started a bit early with stock first dropping on Thursday.

Wednesday, July 11:  $418.65 per share
Thursday, July 12: $413.50 per share
Friday, July 13: $395.80 per share
Monday, July 16: $400.48 per share
Tuesday, July 17: $379.48 per share

Insider Take:

Despite the reactions of investors, Netflix is still a solid company with impressive performance. They continue to do what they do well – providing exclusive, quality content and a positive user experience at an affordable price. With continued investments in original programming and upgrades to their features, we anticipate Netflix will ride out this storm and their stock will rebound.