Netflix Fourth Quarter Earnings – a Solid Beat on Almost All Metrics; U.S. Subscriber Numbers Disappoint

Jan 21, 2020
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Netflix (NASDAQ:NFLX) has reported solid growth numbers for the fourth quarter of 2019 as revenue grew by almost a third on an annual basis and international subscribers surpassed 100 million for the first time. Nonetheless, the company continues to face significant headwinds as several competitors debut their own content streaming services.

How Does Netflix’s Scorecard Stack Up?

For the three months that ended on 31st December 2019, Netflix reported revenues of $5.47 billion which, in turn, marks an increase of 30.6 percent year over year and exceeds expectations of analysts by $20 million. Moreover, the company’s operating income increased by a whopping 112.5 percent on an annual basis, coming out at $459 million. Similarly, the operating margin increased by 320 basis points year-on-year to 8.4 percent.

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Crucially, Netflix added 8.76 million net subscribers this quarter against a consensus forecast of 7.65 million subscribers, thereby, bringing the total to 167.09 million. As per the details revealed, the company added 8.33 million international subscribers during the quarter against consensus expectations of 7.2 million. However, the U.S. and Canada region proved to be a weak spot for the streaming giant with net subscriber additions of 550,000 against consensus estimates of 611,000.

Additionally, Netflix reported a GAAP EPS of $1.30 (not comparable to consensus estimate of $0.53 due to tax adjustments). The streaming company’s free cash flow metric worsened, however, coming out at -$1.67 billion in the fourth quarter versus -$1.32 billion in the comparable quarter last year. Netflix stated in its earnings press release that:

"Our plan is to continually improve FCF each year and to move slowly toward FCF positive. For 2020, we currently forecast FCF of approximately -$2.5 billion. Along the way, we’ll continue to use the debt market to finance our investment needs as we did in Q4’19, when we raised $1.0 billion 4.875% senior notes and €1.1 billion 3.625% senior notes, both due in 2030."

The market has reacted positively to the financial reporting by the streaming giant with the company’s stock posting an increase of 1.29 percent in the after-hours trading (as of 16:57 ET). As of the end of 2019, Netflix has also gained the distinction of being the best-performing stock of the last decade with cumulative gains of over 4,000 percent since 2010.

For the first quarter of 2020, Netflix expects its revenue to increase by $5.73 billion vs expectations of $5.76 billion. The streaming giant has also forecasted a global net subscription growth of 7 million against a growth of 9.6 million registered in the first quarter of 2019. The company is also targeting an operating margin of 16 percent for 2020, an increase of 300 basis points year over year.

Increasing Competition Remains the Streaming Giant’s Key Vulnerability

As mentioned earlier, the streaming sphere is becoming more crowded with the passage of time, a development that goes against Netflix. By May 2020, AT&T’s (NYSE:T) WarnerMedia will have launched its HBO Max streaming service. The $15-per-month service will feature 10,000 hours of streaming content at launch including 1,800 movies and a new Game of Thrones series. Comcast’s (NASDAQ:CMCSA) NBCUniversal is also expected to debut its first streaming service, called Peacock, by April 2020. According to details revealed earlier this month, the service will include 7,500 hours of programing at launch and will offer a free ad-supported streaming option as well. Finally, Apple’s (NASDAQ:AAPL) streaming service – Apple TV Plus – launched earlier in November but its library remains limited to a handful of shows for now.

In the midst of this rising tide of competition, perhaps paradoxically, Netflix has been steadily raising its prices with its most popular plan currently costing $12.99 per month. This may be due to the fact that the company remains the undisputed champion in the streaming sphere. As an illustration, Netflix’s letter to its shareholders includes the following observation:

“We have a big headstart in streaming and will work to build on that by focusing on the same thing we have focused on for the past 22 years - pleasing members. We believe if we do that well, Netflix will continue to prosper. As an example, in Q4, despite the big debut of Disney+ and the launch of Apple TV+, our viewing per membership grew both globally and in the US on a year over year basis, consistent with recent quarters.”

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