Preparing for Netflix’s Q2 Earnings Report - The 1 Article You Need To Read

If you want to read a story to prepare for Netflix’s earnings report tomorrow, my recommendation is this scoop in The Information by Jessica Toonkel. To summarize, Netflix is looking to ensure big budget films deliver strong enough ROI. (Here’s the CNBC link if you don’t have The Information.)

This doesn’t mean that Netflix is “cost cutting” necessarily, as their total content spend could be unchanged by the end of the year. However, it does mean that Netflix needs to be more disciplined in their spending. If a film or series has a big budget and marketing spend, it needs to drive enough customers to justify that. Which is crazy, since Triple Frontier had over 40 million viewers. And that still wasn't allegedly enough.

So why does this article prepare us for the earnings report?

Well, the number I look for each quarter is free cash flow. Here’s my table tracking Netflix actual or estimated FCF losses each year:

For 2019, Netflix has projected losing about what they lost in 2018, or negative $3 billion. They’ve also said they expect to peak in FCF losses this year, with a rebound in 2020. I see the content spending exactly in this light. Netflix wants to ensure they show FCF improvement, otherwise the stock market “could” react negative. (Could in quotes because who can really predict the market?) If somehow 2019 showed FCF over $4 billion or 2020 was above $3 billlion, the story that Netflix can stem losses gets harder to justify.

So today you’ll hear news about subscriber growth internationally, maybe stalled growth in the US, and some datecdotes about random film or TV performances. Oh, and “profit”. But look for the cash flow, as that will likely have the biggest impact on Netflix’s strategic decisions moving forward.

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If you want some other articles to read, I didn’t write a new article for today’s earning report, but many of my old articles are still mostly applicable. Here are the best reads:

Prediction Time: Forecasting the Effect of Netflix’s Price Increase on US Subscribers

(In this article, I tried to forecast how many subscribers Netflix would end 2019. It’s a good lesson in the difficulty of making true numerical predictions, which we all do implicitly anyways.)

Questions for Netflix’s Q1 Earnings Report

(Netflix didn’t really answer any of these questions in the last earnings call, though they did ask if Netflix plans to release more data in the future. They answer was “Sure.”)

Decider: Netflix’s Latest Earnings Report has Something for the Skeptics and the Superfans

(My article at Decider highlighted the six numbers that make both the upside and caution case for Netflix.)

Netflix’s Ordinary Economics (Original and Q1 Update)

(By ordinary, I mean their hit rate on producing new TV shows or movies is average. Which isn’t bad, but so far Netflix’s data on customers hasn’t really impacted their ability to launch new TV series. I updated after the last earnings call as well.

Did More People Watch Crazy Rich Asians or a Netflix Rom-Com Last Summer?

(This helps set up the debate around datecdotes—a term I explain—and how truly popular Netflix originals are. Netflix has since released a ton more datecdotes, and crucially they defined “Viewed” as 70% completion, which helps, but only so much.)