It has been about a month since the last earnings report for Netflix (NFLX - Free Report) . Shares have added about 6.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Netflix due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Netflix's Q1 Earnings Miss, Coronavirus Aids User Growth
Netflix reported first-quarter 2020 earnings of $1.57 per share, missing the Zacks Consensus Estimate by 2.5%. However, the figure jumped 106.6% year over year.
Revenues of $5.77 billion increased 27.6% year over year and also beat the consensus mark of $5.70 billion. Excluding an unfavorable forex impact of $115 million, streaming ARPU grew 8% from the year-ago quarter.
Netflix’s first-quarter results benefited from strong subscriber growth as more and more people were compelled to stay at home due to the coronavirus (COVID-19) pandemic. The streaming giant added 15.77 million paid subscribers globally, which surged 64.3% year over year and was better than its guidance of 7 million paid subscriber addition.
At the end of the first quarter, Netflix had 182.86 million paid subscribers globally, up 22.8% from the year-ago quarter and ahead of management’s expectation of 174.09 million paid subscribers.
Segmental Revenue Details
United States and Canada (UCAN) reported revenues of $2.70 billion, which rose 19.8% year over year and accounted for 46.9% of total revenues. ARPU grew 14% from the year-ago quarter on a foreign-exchange neutral basis.
Paid subscriber base increased 5% from the year-ago quarter to 69.97 million. The company added 2.31 million paid subscribers, up 22.9% year over year.
Europe, Middle East & Africa (EMEA) reported revenues of $1.72 billion, which surged 39.7% year over year and accounted for 29.9% of total revenues. ARPU grew 4% from the year-ago quarter on a foreign-exchange neutral basis.
Paid subscriber base increased 38.1% from the year-ago quarter to 58.73 million. The company added 6.96 million paid subscribers, up 47.5% year over year.
Latin America’s (LATAM) revenues of $793 million increased 25.9% year over year, contributing to 13.7% of total revenues. ARPU grew 12% from the year-ago quarter on a foreign-exchange neutral basis.
Paid subscriber base rose 24.6% from the year-ago quarter to 34.32 million. The company added 2.9 million paid subscribers, up 97.3% year over year.
Asia Pacific’s (APAC) revenues of $484 million rose 51.3% year over year and accounted for 8.4% of total revenues. ARPU dipped 3% year over year on a foreign-exchange neutral basis.
Paid subscriber base soared 63.4% from the year-ago quarter to 19.84 million. The company added 3.6 million paid subscribers, up 135.3% year over year.
Netflix’s first-quarter content slate included Ozark season 3, Tiger King: Murder, Mayhem and Madness, and Love is Blind. The company also released original film Spenser Confidential.
Content slate for the second quarter of 2020 includes the fourth season of Money Heist (La Casa de Papel), which released in early April. Other shows include Space Force, Too Hot to Handle, #BlackAF from Kenya Barris and The Last Dance outside the United States.
Notably, Netflix co-produced The Last Dance, a Michael Jordan documentary with Disney’s ESPN. The show will be launched on Netflix in the United States on Jul 19.
Moreover, notable second-quarter releases include Hollywood from Ryan Murphy and Extraction, starring Chris Hemsworth.
Netflix also strengthened its 2020 content portfolio with the acquisition of Paramount and Media Rights Capital’s The Lovebirds and Legendary Pictures’ Enola Holmes.
Marketing expenses declined 18.3% year over year to $503.8 million. As a percentage of revenues, marketing expenses decreased 490 basis points (bps) to 8.7%.
Moreover, consolidated operating income skyrocketed 108.7% year over year to $958.3 million. Consolidated operating margin expanded 650 bps on a year-over-year basis to 16.6%.
Balance Sheet & Free Cash Flow
Netflix had $5.15 billion of cash and cash equivalents as of Mar 31, 2020 compared with $4.44 billion as of Dec 31, 2019.
Long-term debt was $14.17 billion as of Mar 31, 2020, down from $14.76 billion as of Dec 31, 2019.
Streaming content obligations were $19.2 billion compared with $19.5 billion at the end of the previous quarter.
Netflix reported free cash flow of $162 million against free cash outflow $1.67 billion in the previous quarter.
For the second quarter of 2020, Netflix forecasts earnings of $1.81 per share.
Netflix expects to add 7.50 million paid subscribers, much higher than 2.70 million added in the year-ago quarter. The company expects to end the second quarter of 2020 with 190.36 million paid subscribers globally, up 25.6% from the year-ago quarter.
Total revenues are anticipated to be $6.05 billion, up 22.8% year over year.
Operating margin is projected at 17.9%, up from 14.3% in the year-ago quarter.
For 2020, the company still expects operating margin of 16%. However, it expects to set a modest operating margin growth target for 2021 on currency headwind due to the strong U.S. dollar is anticipated to persistently impact Netflix’s international business.
Moreover, Netflix now expects 2020 free cash outflow to be $1 billion or less than its prior free cash flow expectation of $2.5 billion. Netflix reported free cash outflow of $3.3 billion in 2019.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 18.56% due to these changes.
Currently, Netflix has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Netflix has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.