Earnings season will kick into high gear next week. One of the most notable companies scheduled to report its second-quarter results is streaming-TV giant Netflix (NASDAQ: NFLX). The company will report its latest quarterly results on Wednesday.
Netflix kept up its strong growth in its most recent quarter with revenue increasing 22% year over year, as paid members jumped 25%. With such robust performance in the rearview mirror, investors will be looking for more impressive results in the company's second quarter. Ahead of Netflix's earnings report, here's a look at three items investors may want to watch.
Image source: Netflix.
For the company's second quarter, management guided for revenue of $4.93 billion, up 26.1% year over year. This would notably mark an acceleration over Netflix's 22.2% revenue growth in Q1. The higher revenue will be driven by a combination of growth in paid members and an increase in revenue per member because of the company's recent price increases.
Netflix increased prices in Canada in the fourth quarter of 2018 and announced a price increase in the U.S. in January. While the price increase was effective immediately for new U.S. subscribers, it took three months for the increases to roll out to existing subscribers. This means many of the price increases in the company's important domestic market occurred during Q2. Netflix was also in the process of rolling out price increases in Brazil, Mexico, and parts of Europe during Q2.
Earnings per share
Big spending on content has been weighing on Netflix's operating margin recently. The key metric narrowed in the company's first quarter of 2019, falling from 12.1% in the year-ago period, to 10.2%. This meant earnings per share (EPS) grew at a slower rate than revenue -- EPS increased 19% year over year.
In Netflix's second quarter, the company's operating margin is expected to turn upward again, expanding from 11.8% in the second quarter of 2018 to 12.5%. Unfortunately, earnings per share will likely decline despite this operational tailwind. This is because the company expects an effective tax rate of 48% in the second quarter of 2019, "due to one time discrete events," management explained in Netflix's first-quarter shareholder letter.
As a result, the company guided for second-quarter EPS of $0.55, down from $0.85 in the year-ago period.
Netflix lowered its forecast for free cash flow in 2019. The company expects free cash flow of negative $3.5 billion, down from previous guidance for negative $3 billion. The worsened outlook is due to expected "higher cash taxes related to the change in our corporate structure and additional investments in real estate and other infrastructure."
Will management maintain its outlook for the key metric this time?
Investors should also look for Netflix to reiterate its guidance for free cash flow to improve in 2020 and each year thereafter.
Netflix reports its second-quarter results after market close on Jul. 17.
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