Netflix (NFLX) Q4 Earnings Beat, Paid Subscriber Count Up

Netflix (NASDAQ:NFLX) reported fourth-quarter 2018 earnings of 30 cents per share that beat the Zacks Consensus Estimate by 6 cents. The figure was much lower than 41 cents reported in the year-ago quarter but better than management’s guidance of 23 cents.

Revenues of $4.19 billion lagged the consensus mark of $4.21 billion but surpassed management’s guidance. The top line increased 27.4% year over year, driven by a solid 36% jump in streaming revenues from a year ago.

Shares were down almost 4% in after-hour trading, apparently due to weak guidance for U.S. streaming paid net additions for the first quarter of 2019. Netflix recently raised prices for new members in the United States. The latest pricing will be phased out for existing members over the first and second quarter, which management believes will eventually lift average selling price (ASP).

Notably, Netflix has returned 60.2% in the past year, significantly outperforming the industry’s 14% rise.

Subscriber Addition Strong on International Growth

Netflix added 8.84 million subscribers, better than the guidance of 7.6 million and the year-ago quarter figure of 6.62 million, primarily driven by strong growth in international markets.

At the end of the quarter, Netflix had 139.26 million paid subscribers globally, up 25.9% from the year-ago quarter. ASP increased 3% year over year. Notably, Netflix added 29 million subscribers in 2018 compared with 22 million in 2017.

In the U.S. streaming segment, Netflix’s subscriber base totaled 58.49 million, up from 52.81 million in the year-ago quarter. The company added roughly 1.53 million paid subscribers, slightly better than the guidance of 1.50 million.

In the International Streaming segment, the company recorded 80.77 million paid members compared with 57.83 million in the year-ago quarter. The company added 7.31 million paid members much better than management’s expectation of 6.10 million.

Excluding the impact of foreign exchange, international ASP increased 6% year over year. During the quarter, Netflix raised prices in Canada and Argentina.

Original Content Expansion Continues

Netflix’s expanding original content portfolio is a major growth driver. The success of Roma and Bird Box validates the company’s evolution as a major movie studio.

Roma was announced the best movie of 2018 by the New York Film Critics Circle and won the Golden Lion Award. It also won the award for best foreign-language film at this year’s Golden Globes. The streaming giant won five Golden Globes across movies and televisions, leading all studios in the race.

The company estimates that Bird Box will have a viewership of 80 million member households, including higher rate of repeat viewing in the first four weeks of release. Earlier, Netflix stated that Bird Box recorded highest viewership for any movie in the Dec 21-27 period. Per data from Nielsen, quoted by Variety, almost 26 million unduplicated users viewed Bird Box during the period.

Notably, Roma, Bird Box and The Ballad of Buster Scruggs were the three original movies that hit the theaters first and were later released on the streaming platform.

Further, in the television category, Netflix’s The Kominsky Method won the Golden Globes for best comedy or musical. The company’s Spanish original Elite has gained a viewership of 20 million member households globally in the first four weeks of the show’s availability on the platform.

Moreover, You, which started as a “Lifetime Linear” series in the United States and now a Netflix original, is expected to hit a viewership of 40 million member households in its first four weeks on the streaming platform.

From Hollywood, apart from the The Kominsky Method, Netflix launched series like The Haunting of Hill House and Chilling Adventures of Sabrina. New seasons of Big Mouth and Narcos: Mexico returned on the platform in the quarter.

For 2019, Netflix’s content slate is pretty engaging. The company is now focusing on originals instead of 2nd run programming. Titles include The Umbrella Academy (Feb 15), Triple Frontier (March), Martin Scorsese’s The Irishman, Michael Bay’s 6 Underground and Ryan Murphy’s The Politician.

The list includes returning seasons of The Crown, 13 Reasons Why, La Casa de Papel, Elite and Season 3 of the Stranger Things (Jul 4).

Quarter Details

International Streaming revenues (50.3% of revenues) soared 35.8% year over year to $2.11 billion.

Domestic Streaming revenues (47.7% of revenues) improved 22.4% from the year-ago quarter to about $2 billion.

The DVD business (2% of revenues) declined 19% year over year to $85.2 million.

Coming to expenses, marketing surged 56.6% year over year to $730.4 million. As percentage of revenues, marketing expenses increased 320 basis points (bps) to 17.4%.

Consolidated contribution margin (revenues minus the cost of revenues and marketing cost) contracted 110 bps on a year-over-year basis to 17.3%. While International Streaming segment contribution margin expanded 140 bps, U.S. Streaming segment contracted 130 bps.

Moreover, consolidated operating income declined 12.1% year over year to $481.1 million. Consolidated operating margin contracted 230 bps on a year-over-year basis to 5.2%, slightly better than management’s guidance of 5%.

Balance Sheet

Netflix had $3.79 billion of cash and cash equivalents as of Dec 31, 2018, compared with $3.07 billion as of Sep 30, 2018.

Long-term debt was $10.36 billion, up from $8.34 billion at the end of the previous quarter. Streaming content obligations were $19.3 billion compared with $18.6 billion at the end of the previous quarter.

Netflix reported free cash outflow of $1.32 billion compared with $859 million in the previous quarter.

Guidance

For the first quarter of 2019, Netflix forecasts earnings of 56 cents per share, implying a year-over-year decline of 12.5%. The Zacks Consensus Estimate is pegged at 83 cents.

Netflix expects to add 8.9 million paid subscribers, up 7.7% year over year. In the U.S. Streaming segment, the company anticipates to gain 1.6 million subscribers, down 29.8% from the year-ago quarter.

However, momentum in the International Streaming segment is expected to continue with paid subscriber addition of 7.3 million, up 22.1% year over year. Moreover, Netflix expects international ASP to increase year over year, excluding foreign exchange.

The U.S. and International streaming revenues are expected to be $2.06 billion and $2.35 billion, respectively. Total revenues, including the DVD business, are anticipated to be $4.49 billion.

For the fourth quarter, operating margin is projected at 8.9%, down from 12.1% in the year-ago quarter, apparently due to higher spending on content, including original movies. For 2019, Netflix expects operating margin of 13%.

The company continues to expect free cash outflow of $3-$4 billion for 2018.

Conclusion

Netflix’s fourth-quarter subscriber addition rate reflects growing appeal of the streaming platform, which is primarily driven by a solid content portfolio of in-house originals. This is also helping the company counter competition from the likes of AT&T’s (NYSE:T) HBO, Amazon (NASDAQ:AMZN) Prime video and Alphabet’s (NASDAQ:GOOGL) YouTube.

However, Netflix considers Epic Games’ Fortnite as its closest competitor instead of HBO.

Moreover, partnerships with telcos like Telefonica (MC:TEF) in Spain, KDDI in Japan, Comcast (NASDAQ:CMCSA) and T-Mobile in the United States, and Sky in the U.K. and Germany are expected to drive subscriber addition.

Currently, Netflix has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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