Netflix (NASDAQ:NFLX) reported what would usually be thought-about a blowout quarter after the market shut on Thursday. However these aren’t regular occasions. The corporate had a document variety of second-quarter subscribers, making it the second-highest quarterly progress in Netflix’s historical past. Income additionally hit an all-time excessive, topping $6.1 billion, up almost 25% yr over yr and marking the primary time quarterly income had surpassed the $6 billion milestone.
It wasn’t all good, nonetheless. Netflix reported earnings per share (EPS) of $1.59, about 12% decrease than each administration and analysts had anticipated. The inventory initially slumped as a lot as 8% on the information earlier than recovering barely and ending the day down 6.5%.
That is a type of circumstances the place issues weren’t fairly as dangerous as they appeared. To grasp why, nonetheless, traders have to look past the headline numbers as they fail to inform the entire story.
Large earnings miss, or was it?
Netflix reported EPS of $1.59 for the second quarter, and whereas that determine was up 165% yr over yr, it missed administration’s forecast and analysts’ consensus estimates, which each got here in at $1.81 per share.
Nonetheless, Netflix reported two non-cash expenses that hit the underside line, making issues look far worse than they really have been. Administration shared related particulars within the shareholder letter:
EPS of $1.59 vs. $0.60 a yr in the past included a $119 million non-cash unrealized loss from [foreign currency] remeasurement on our Euro-denominated debt and a $220 million non-cash valuation allowance for deferred tax belongings (because of current laws limiting the usage of California [research and development] credit).
That provides as much as $339 million in non-cash expenses. Netflix had about 454 million shares excellent throughout the quarter, so these one-time changes dinged EPS to the tune of $0.75 per share, simply making up the “miss” of $0.22 per share.
Then there’s these pesky overseas trade charges
One other issue that impacted Netflix’s backside line was the energy of the U.S. greenback. In occasions of uncertainty — for which the COVID-19 pandemic definitely qualifies — overseas traders flock to the security and safety of the U.S. greenback. In consequence, many foreign currency lose worth, at the very least on paper, in comparison with the greenback. As Netflix will get a rising portion of its income from worldwide markets, this could trigger a giant swing in web earnings.
That is what occurred throughout the second quarter as Netflix reported a overseas trade lack of $289 million. The corporate mentioned that the common income per person (ARPU) grew by simply 0.4% yr over yr, however excluding the impression of trade charges, ARPU grew 5%. These currency-related headwinds don’t have anything to do with the sturdy demand for Netflix streaming providers, however they nonetheless affected the underside line by roughly $0.64 per share. The corporate little doubt does its finest to estimate the impression of overseas trade charges on outcomes when it points its steering, however it’s essential to keep in mind that that is extra artwork than science.
Understandably weak steering?
To date, the tech giant has had a banner yr relating to subscriber progress. Because the COVID-19 pandemic performed out the world over and lockdowns became the order of the day, folks flocked to Netflix for its huge catalog of leisure. The corporate added an all-time document 16 million subscribers within the first quarter, adopted by 10 million within the second quarter. That quantities to an astonishing 26 million new paid memberships thus far in 2020. To place that into perspective, Netflix added 28 million for all of 2019.
Nonetheless, administration is worried that the corporate’s progress within the first half of 2020 has come on the expense of the remainder of the yr. Within the shareholder letter, Netflix mentioned, “We’re anticipating paid web [additions] shall be down yr over yr within the second half as our sturdy first half efficiency possible pulled ahead some demand from the second half of the yr.”
Netflix began its missive by saying, “We stay in unsure occasions,” and that may nicely be an understatement. Given the unprecedented scenario, Netflix administration is being understandably conservative with its steering, forecasting simply 2.5 million new subscribers for the third quarter, beneath the 6.Eight million it added within the year-ago quarter.
Given the truth that Netflix shares had gained 63% thus far this yr going into its earnings report, it is not that stunning that some short-sighted traders would turn into nervous on the prospect of the “earnings miss” and slowing progress for the streaming big.
Nonetheless, given the variety of transferring elements that performed into the underside line outcomes and the already stellar subscriber progress that Netflix has achieved thus far this yr, I might argue that long-term traders merely don’t have anything to worry about.
— to www.fool.com