Wall Street won’t know if Netflix will beat its subscriber guidance in Q3 until the company reports earnings next week, but the signs are already there it will do just that, like it has in previous quarters of 2020.
Clue #1: The company is in the process of raising prices of standard and premium plan subscribers in Canada, it was reported last week. That’s not something an SVOD would typically do in a territory where it’s hurting for market share.
Clue #2: Netflix on Tuesday confirmed it ended its 30-day free trials in the U.S. It seems telling that this move is similar to how Disney+ (the most dominant new video streamer) ended free trials in June and dissimilar to how Apple TV+ (one of the suspected slower-to-start new video streamers) just extended free trials.
These represent just two moves that may have been planned long ago. Furthermore, most Netflix subscriber growth comes from the EMEA, LATAM and APAC regions.
But if Netflix was dissatisfied with how growth was going in recent months in the U.S. and Canada, it seems likely that the moves mentioned above would be avoided or at least postponed.
Additionally, when these moves are coupled with app download data in the context of the relatively low Q3 guidance (2.5M subs globally versus 7.5 guided for in Q2) Netflix has to beat, it seems more reasonable to believe the streamer will report it’s beaten its own estimates come Tuesday.
Investment bank Evercore ISI cited Sensor Tower figures in an October 8 note and said international download volumes are consistent with over 7M international net subscriber adds in Q3, for example.
Sensor Tower data in that note also showed Netflix’s year-over-year international app download growth was up in the majority of Q3 weeks.
Meanwhile, an early October J.P. Morgan note cited Apptopia download data that suggested Q3 subscriber growth could be as much as 5.4 million.
Apptopia estimates Netflix’s mobile app download was downloaded about 60.9 million times globally in Q3, about 14% down from Q2, data provided to Variety Intelligence Platform from the app analytics firm shows.
Also keep in mind that sell-side consensus expectations call for Netflix to add 2.8M global subs, lower than J.P. Morgan and Evercore estimates but still higher than Netflix’s guidance of 2.5M.
Even though beating that 2.5M figure will be important to Wall Street and Netflix, the appropriate award for Netflix surpassing that figure is closer to a participation trophy than it is a gold medal.
Netflix’s guidance given during its Q2 earnings should be viewed as an insurance policy more than an earnest expectation of what it truly expected to add in the coming three months.
Like everybody else, the company just didn’t know how the virus would travel during Q3, meaning it likely estimated conservatively to leave room for error and account for businesses being opened more quickly than it anticipated.
That uncertainty is why Netflix in its Q1 earnings said its Q2 guidance was “mostly guesswork.”
But secondly and more importantly, guiding lower than previous quarters helps temper investor expectations, which we argued were unrealistic after Netflix’s Q2 earnings.
By providing a relatively low subscriber guidance, Netflix can ultimately ensure it gets closer to hitting investor expectations that end up higher than they should be. That dynamic is kind of like a pawn shop owner starting with a bidding price too low to account for a seller’s starting price that’s higher than it should be.
The unrealistic investor expectation is partly why Netflix management has consistently warned that its big growth in Q1 and Q2, when it respectively added 15.8M and 10.1M global subs, likely ate away at potential growth during H2 2020.
In addition to keeping expectations in check, those warnings also help account for unexpected gaffes, like the U.S. controversy surrounding original film “Cuties.”
While the French arthouse film led to some cancellations, those might have been short-lived, according to data from 7Park in late September. Variety reported that data implied the “Cuties” cancellations could have been immaterial.
That’s good news for those putting more stock into Evercore’s Q3 subscriber estimates, as the firm caveated its data didn’t reflect churn trends in the quarter. J.P. Morgan’s estimate, on the other hand, takes the controversy’s potential impact into account.