3 Things Netflix Management Wants You to Know

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix (NASDAQ: NFLX) grabbed its fair share of headlines on Wednesday when the company revealed its member growth for the period was much worse than expected. But there’s more to the quarter than this metric. Netflix notably saw its quarterly year-over-year revenue growth rate accelerate to 26% and its operating margin expand from 11.8% in the second quarter of 2018 to 14.3%.” data-reactid=”11″>Netflix (NASDAQ: NFLX) grabbed its fair share of headlines on Wednesday when the company revealed its member growth for the period was much worse than expected. But there’s more to the quarter than this metric. Netflix notably saw its quarterly year-over-year revenue growth rate accelerate to 26% and its operating margin expand from 11.8% in the second quarter of 2018 to 14.3%.

Other key insights into Netflix’s business can be gleaned from management’s commentary in the company’s shareholder letter. In its updates, the streaming-TV giant provides substantial commentary on its business, including comments on competition, member growth trends, and more.

Here’s a close look at some of the most telling insights from the letter.

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Image source: Getty Images.

What caused Netflix’s underwhelming member growth?

Netflix misses its guidance for subscribers from time to time. Indeed, it has missed its forecast in one quarter every year since 2016. But this miss was more significant than usual. Management had guided for 5 million new paid members, yet actual new paid members were just 2.7 million. Management, however, didn’t seem concerned in the company’s second-quarter shareholder letter.

“We don’t believe competition was a factor since there wasn’t a material change in the competitive landscape during Q2, and competitive intensity and our penetration is varied across regions (while our over-forecast was in every region),” explained management. “Rather, we think Q2’s content slate drove less growth in paid net adds than we anticipated.”

The company also cited a small negative impact on subscriber growth due to price increases, as well as some impact from a larger-than-realized pull-forward in member growth in the prior quarter, when paid member additions crushed expectations.

What about Netflix’s intensifying competitive environment?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Later in the letter, management spoke more at length about the onslaught of new competition joining the streaming-TV space, including new services from Walt Disney, Apple, and AT&amp;T‘s WarnerMedia. The competition is "fierce," Netflix admitted.” data-reactid=”31″>Later in the letter, management spoke more at length about the onslaught of new competition joining the streaming-TV space, including new services from Walt Disney, Apple, and AT&T‘s WarnerMedia. The competition is “fierce,” Netflix admitted.

Netflix management believes that other companies’ growing investments in streaming entertainment also provides some upside by getting more consumers to make the transition to streaming TV. “The innovation of streaming services is also drawing consumers to shift more and more from linear television to streaming entertainment,” Netflix explained. In addition, management believes there’s “much room for growth” as the company currently earns only approximately 10% of consumers’ television time — and an even smaller portion of their mobile screen time — in the U.S., Netflix’s most developed market.

<h2 class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Netflix does not plan on selling ads” data-reactid=”33″>Netflix does not plan on selling ads

Netflix is — and will remain — an advertising-free business, the company emphasized during its shareholder letter. Management continued:

That remains a deep part of our brand proposition; when you read speculation that we are moving into selling advertising, be confident that this is false. We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.

Without introducing an ad-driven tier, Netflix will remain reliant on periodical price increases to boost its average revenue per user over the long haul and eventually become free cash flow positive.

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