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Veteran video streaming Netflix (NASDAQ: NFLX) will publish its results for the third quarter of 2018 after the closing bell on Tuesday, October 16th. Three months ago, the second quarter report was below some key expectations and the title has suffered since.
Here are the main things to watch for in the next Netflix update.
Source of the image: Netflix.
1. Subscriber additions
Netflix management expects to add approximately 650,000 net new members to the United States in the third quarter, alongside 4.4 million international additions, for a total of 5 million net subscribers. Achieving this goal on the nose would give Netflix 58 million national members, up from 52.8 million a year ago. Foreign subscribers would increase from 56.5 million to 77.1 million over the same period.
This is where Netflix went bankrupt in the second quarter, registering 6.2 million subscribers worldwide, but delivering only 5.2 million. Management emphasizes that these objectives are the company's best estimate of current trends, rather than the expected growth ambitions. Reed Hastings, Chief Executive Officer, and Chief Financial Officer David Wells say investors should expect real-world results to be below expectations as often as they go above and beyond official targets .
A steady stream of surprises about subscriber additions resulted in a slight panic when Netflix finally released results below its targets. As market makers have absorbed and accepted the win-lose-lose principle, subscriber additions remain the most-watched figures in Netflix's quarterly reports, including this one.
2. The long road to positive cash flow
The company is burning a lot of money these days, and there will be more dollar bills on this bonfire in the third quarter. Netflix used free cash flow of $ 559 million in the second quarter and expects planned content production plans to lead to even faster cash flow in the second half of the year.
The long-term plan is to pay for exclusive content now and reap the rewards of the resulting portfolio for many years. The mere fact of paying license fees to other companies for rights to show movies and television series made by someone else is a radical change. Netflix remains at a turning point, even though the current trend is beginning to look promising. Any new indication of exactly when Netflix plans to generate free cash flow instead of consuming it would be appreciated.
NFLX Free Cash Flow Data by YCharts. TTM = last 12 months.
3. Deal with new competitors
The continuous media market is teeming with new faces, and new entries are often tied to very familiar business names. Everyone wants to capture its exclusive share of this cake – before the fast-growing industry created by Netflix turns into a more mature industry with fewer and slower growth opportunities.
By the end of 2018, Netflix's multi-year streaming partnership with Walt Disney (NYSE: DIS) is exhausted and will be replaced by an internal video platform of the House of Mouse, built around the technology developed for the live broadcast of Major League Baseball sports events. Some Disney content will remain as the Marvel Defenders portfolio that Disney has created in direct partnership with Netflix. But the Pixar, Star warsand movies on the big screen will stop following Netflix's direction.
Walmart (NYSE: WMT) found a partner in MGM Studios to offer original content for its troubled Vudu service. Beginning with a serialized sequel to the 1983 comedy "Mr. Mom", Walmart hopes to capture the eyes and portfolios of Central America. Vudu is not an absolute rival between Netflix, since the retail service offers content for sale or rent instead of a monthly subscription model, but they play in the same general sandbox.
The subscription market will soon see a familiar face making waves. AT & T (NYSE: T) will build a streaming service for its recently acquired Time Warner catalog, launching the still unknown platform by the end of 2019. The telecommunications giant insists that this service will not replace the existing HBO service. Now, but will incorporate some of the features of HBO content to address a wider audience. It would not be surprising to see the content of Time Warner later dropped from the Netflix catalog.
Netflix must support this growing collection of industry rivals. CEO Hastings said his company should compete with consumer attention with powerful alternatives such as video games or wine consumption. From this point of view, another video service or two might not be too terrifying. Investors have yet to rest assured that this company has put in place a plan to deal with this increasingly fragmented market and the imminent disappearance of popular content collections.
Anders Bylund owns shares in Netflix and Walt Disney. The Motley Fool owns shares and recommends Netflix and Walt Disney. Motley Fool has a disclosure policy.
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