Netflix modest earnings beat and big positive after-hours reaction good news for earnings season market

Netflix (NFLX) shares were down 1.24% during the day as investors and traders seemed to be positioning themselves for an earnings miss. (Netflix doesn’t have a record of turning in earning surprises–probably because Wall Street is so positive on the stock. For the fourth quarter of 2017, Netflix met projections and in the third quarter it fell 3 cents a share short of estimates.)
 
But the stock took off in after-hours trading, climbing by 6.8%, on the back of  very modest earnings beat for the first quarter and upside guidance for the second quarter.
 
I think that’s a good sign for the market’s performance as earnings season builds momentum.
 
The company beat Wall Street estimates for first quarter earnings by just a penny a share (at 64 cents a share.) Revenue climbed 40.3% to $3.7 billion, just a tad over the $3.69 billion projected by Wall Street. Average paid streaming memberships rose by 25% and the average selling price increased by 14%. (U.S. streaming subscribers rose by 1.96 million versus the company’s guidance for $1.45 million. International steaming subscriptions gained 5.46 million versus guidance for 4.9 million.) The result was an operating margin of 12%, up 2.32 percentage points year over year.
 
Netflix raised its guidance for the second quarter to earnings of 79 cents a share against the 66 cents a share consensus projection. Revenue will climb, the company projects, to $3.93 billion for the quarter against the $3.89 billion Wall Street estimate. For the full 2018 year the company raised its estimate of operating margins to 10-11% from an earlier estimate of 10%. Spending on content will be $7.5 billion to $8.08 billion for the year and will be weighted to the second half of 2018.
 
Thanks to that spending on content and marketing the company estimates that it will be cash flow negative to the tune of $3 billion to $4 billion in 2018 and for several years after that. The company had $.6 billion in cash at the end of the quarter and will raise debt in 2018 to cover its content spending.