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Netflix (NFLX) Beats on Q3 Earnings, Subscriber Addition Up
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Netflix (NFLX - Free Report) reported third-quarter 2018 earnings of 89 cents per share that beat the Zacks Consensus Estimate by 21 cents. The figure was much better than 29 cents reported in the year-ago quarter and management’s guidance of 68 cents per share.
Revenues of almost $4 billion surpassed the consensus mark of $3.98 billion and were almost in line with management’s guidance. Top line surged 34% year over year, driven by solid streaming revenues that jumped 36% from the year-ago quarter.
Shares were up almost 11% in after-hour trading. Notably, shares of Netflix have skyrocketed 101.5% on a year-to-date basis, significantly outperforming the industry’s 23.5% rally.
Subscriber Base Hits 137 Million
Netflix added 6.96 million subscribers, much better than the previously expected 5 million, in the quarter, primarily driven by strong growth across all regions, including Asia. Paid net additions were 6.07 million, better than 4.99 million in the year-ago quarter.
The company now has more than 137 million subscribers globally. At the end of the quarter, Netflix's paid streaming members across the globe were 130.42 million, up 25.4% from the year-ago quarter. The figure is impressive, considering 8% increase in its average selling price (ASP).
In the Domestic Streaming segment, Netflix’s subscriber base was 58.46 million, up from 52.77 million in the year-ago quarter. The company added roughly 1.09 million of subscribers (better than 0.65 million expectation) in the quarter. Paid members increased 10.9% from the year-ago period to 56.96 million. The company added one million paid members in the quarter.
In the International Streaming segment, the company recorded 78.64 million members compared with 56.48 million in the year-ago quarter. Netflix added 5.87 million of subscribers in the quarter, better than projections of 4.35 million. Paid members were 73.46 million, up 39.4% from the year-ago quarter. The company added 5.07 million paid members in the quarter.
Original Content Expansion Continues
Netflix’s content portfolio is segregated into three parts. Licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate) and original first-window content from the Netflix studio, such as Stranger Things.
Netflix’s expanding original content portfolio is the major growth driver. This year at Emmy’s the company got 112 nominations spanning 40 shows, docs and specials across nearly all categories. Netflix finally won 23 Emmy awards, tying with AT&T’s (T - Free Report) HBO.
The third quarter had a strong programming slate, with new seasons of popular shows like Orange is the New Black, Ozark and Marvel’s Luke Cage. Insatiable debuted in the quarter along with Maniac, a limited series starring Emma Stone and Jonah Hill.
Netflix’s animated adult comedy portfolio expanded in the quarter with the availability of Disenchantment.
Netflix’s effort to strengthen regional programming is a key catalyst. The company is working on projects across India, Mexico, Spain, Italy, Germany, Brazil, France, Turkey and the entire Middle East.
Following Sacred Games, Netflix streamed Ghoul in India. Management stated that the latest Mexican original, La Casa de las Flores has become a big hit.
The company’s growing roster of original films included Like Father, Sierra Burgess Is a Loser, and To All the Boys I’ve Loved Before in the quarter. These movies were part of the company’s Summer of Love initiative. Netflix stated that more than 80 million accounts have watched one or more of the Summer of Love films globally.
Netflix is launching 22 July by Oscar-nominated director Paul Greengrass, simultaneously in cinema screens as well as on the streaming platform. Similarly, in December, the company will release ROMA, by Oscar-winning director Alfonso Cuaron.
Quarter Details
International Streaming revenues (49.3% of revenues) soared 48.7% year over year to $1.97 billion. Unfavorable foreign exchange impacted revenues by more than $90 million. Excluding the impact of foreign exchange, ASP grew more than 11% year over year and 2%, sequentially.
Domestic Streaming revenues (48.3% of revenues) improved 25.2% from the year-ago quarter to about $1.94 billion.
The DVD business (2.2% of revenues) declined 19% year over year to $89 million.
Consolidated contributions margin (revenues minus the cost of revenues and marketing cost) was 28.8% compared with 22.8% in the year-ago quarter.
Consolidated operating income soared 130.1% year over year to $481.1 million. Consolidated operating margin expanded 500 basis points (bps) on a year-over-year basis to 12%, much better than management’s guidance of 10.5%. Lower expenses drove results, as a portion of content and marketing expenses was shifted to the fourth quarter.
Balance Sheet
Netflix had $3.07 billion of cash and cash equivalents as of Sep 30, 2018 compared with $3.91 billion as of Jun 30, 2018.
Long term debt was $8.34 billion at the end of the quarter. Streaming content obligations were $18.6 billion compared with $18.4 billion at the end of the previous quarter.
The company reported free cash outflow of $859 million compared with $559 million in the previous quarter.
Guidance
For the fourth quarter of 2018, Netflix forecasts earnings of 23 cents per share. The Zacks Consensus Estimate is currently pegged at 71 cents.
Domestic and international streaming revenues are expected to be $1.93 billion and $1.97 billion, respectively. Total streaming revenues are expected to be $3.90 billion, while total revenues, including the DVD business, are anticipated to be almost $3.99 billion.
Netflix expects to add 9.4 million subscribers, up 13% year over year in the fourth quarter of 2018. Paid member addition is expected to increase 15% to 7.6 million.
Beginning January 2019 earnings (Netlfix’s fourth-quarter 2018), the company will only provide guidance for paid membership data. From 2020, Netflix will stop reporting end-of-quarter free trial count.
The company forecasts operating margin to be near the lower end of its guided range of 10-11% for fiscal 2018. For the fourth quarter, operating margin is projected to be 5%, down from 7.5% in the year-ago quarter, primarily due to higher spending on content, including original movies.
Netflix continues to expect free cash outflow of $3-$4 billion for 2018.
Conclusion
Netflix’s third-quarter subscriber addition rate reflects growing appeal of the streaming platform, which is primarily driven by a solid content portfolio mix of in-house originals and licensed content. This is also helping the company steer away competition from the likes of HBO, Amazon Prime and Alphabet’s (GOOGL - Free Report) YouTube.
Moreover, partnerships with telcos like Telefonica in Spain and Latin America, and KDDI in Japan are expected to boost subscriber addition. In the third quarter, Netflix rolled out its first mobile bundle in Japan with KDDI. The company also expanded its collaboration with Verizon (VZ - Free Report) to pre-install the Netflix app on Android phones.
Further, the inclusion of Netflix into Sky’s pay-TV packages, which it expects to rollout in the fourth quarter, presents significant growth opportunity.
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New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
Image: Bigstock
Netflix (NFLX) Beats on Q3 Earnings, Subscriber Addition Up
Netflix (NFLX - Free Report) reported third-quarter 2018 earnings of 89 cents per share that beat the Zacks Consensus Estimate by 21 cents. The figure was much better than 29 cents reported in the year-ago quarter and management’s guidance of 68 cents per share.
Revenues of almost $4 billion surpassed the consensus mark of $3.98 billion and were almost in line with management’s guidance. Top line surged 34% year over year, driven by solid streaming revenues that jumped 36% from the year-ago quarter.
Shares were up almost 11% in after-hour trading. Notably, shares of Netflix have skyrocketed 101.5% on a year-to-date basis, significantly outperforming the industry’s 23.5% rally.
Subscriber Base Hits 137 Million
Netflix added 6.96 million subscribers, much better than the previously expected 5 million, in the quarter, primarily driven by strong growth across all regions, including Asia. Paid net additions were 6.07 million, better than 4.99 million in the year-ago quarter.
The company now has more than 137 million subscribers globally. At the end of the quarter, Netflix's paid streaming members across the globe were 130.42 million, up 25.4% from the year-ago quarter. The figure is impressive, considering 8% increase in its average selling price (ASP).
In the Domestic Streaming segment, Netflix’s subscriber base was 58.46 million, up from 52.77 million in the year-ago quarter. The company added roughly 1.09 million of subscribers (better than 0.65 million expectation) in the quarter. Paid members increased 10.9% from the year-ago period to 56.96 million. The company added one million paid members in the quarter.
Netflix, Inc. Price, Consensus and EPS Surprise
Netflix, Inc. Price, Consensus and EPS Surprise | Netflix, Inc. Quote
In the International Streaming segment, the company recorded 78.64 million members compared with 56.48 million in the year-ago quarter. Netflix added 5.87 million of subscribers in the quarter, better than projections of 4.35 million. Paid members were 73.46 million, up 39.4% from the year-ago quarter. The company added 5.07 million paid members in the quarter.
Original Content Expansion Continues
Netflix’s content portfolio is segregated into three parts. Licensed non-first-window content such as Shameless, licensed original first-window content such as Orange is the New Black (owned and developed by Lionsgate) and original first-window content from the Netflix studio, such as Stranger Things.
Netflix’s expanding original content portfolio is the major growth driver. This year at Emmy’s the company got 112 nominations spanning 40 shows, docs and specials across nearly all categories. Netflix finally won 23 Emmy awards, tying with AT&T’s (T - Free Report) HBO.
The third quarter had a strong programming slate, with new seasons of popular shows like Orange is the New Black, Ozark and Marvel’s Luke Cage. Insatiable debuted in the quarter along with Maniac, a limited series starring Emma Stone and Jonah Hill.
Netflix’s animated adult comedy portfolio expanded in the quarter with the availability of Disenchantment.
Netflix’s effort to strengthen regional programming is a key catalyst. The company is working on projects across India, Mexico, Spain, Italy, Germany, Brazil, France, Turkey and the entire Middle East.
Following Sacred Games, Netflix streamed Ghoul in India. Management stated that the latest Mexican original, La Casa de las Flores has become a big hit.
The company’s growing roster of original films included Like Father, Sierra Burgess Is a Loser, and To All the Boys I’ve Loved Before in the quarter. These movies were part of the company’s Summer of Love initiative. Netflix stated that more than 80 million accounts have watched one or more of the Summer of Love films globally.
Netflix is launching 22 July by Oscar-nominated director Paul Greengrass, simultaneously in cinema screens as well as on the streaming platform. Similarly, in December, the company will release ROMA, by Oscar-winning director Alfonso Cuaron.
Quarter Details
International Streaming revenues (49.3% of revenues) soared 48.7% year over year to $1.97 billion. Unfavorable foreign exchange impacted revenues by more than $90 million. Excluding the impact of foreign exchange, ASP grew more than 11% year over year and 2%, sequentially.
Domestic Streaming revenues (48.3% of revenues) improved 25.2% from the year-ago quarter to about $1.94 billion.
The DVD business (2.2% of revenues) declined 19% year over year to $89 million.
Consolidated contributions margin (revenues minus the cost of revenues and marketing cost) was 28.8% compared with 22.8% in the year-ago quarter.
Consolidated operating income soared 130.1% year over year to $481.1 million. Consolidated operating margin expanded 500 basis points (bps) on a year-over-year basis to 12%, much better than management’s guidance of 10.5%. Lower expenses drove results, as a portion of content and marketing expenses was shifted to the fourth quarter.
Balance Sheet
Netflix had $3.07 billion of cash and cash equivalents as of Sep 30, 2018 compared with $3.91 billion as of Jun 30, 2018.
Long term debt was $8.34 billion at the end of the quarter. Streaming content obligations were $18.6 billion compared with $18.4 billion at the end of the previous quarter.
The company reported free cash outflow of $859 million compared with $559 million in the previous quarter.
Guidance
For the fourth quarter of 2018, Netflix forecasts earnings of 23 cents per share. The Zacks Consensus Estimate is currently pegged at 71 cents.
Domestic and international streaming revenues are expected to be $1.93 billion and $1.97 billion, respectively. Total streaming revenues are expected to be $3.90 billion, while total revenues, including the DVD business, are anticipated to be almost $3.99 billion.
Netflix expects to add 9.4 million subscribers, up 13% year over year in the fourth quarter of 2018. Paid member addition is expected to increase 15% to 7.6 million.
Beginning January 2019 earnings (Netlfix’s fourth-quarter 2018), the company will only provide guidance for paid membership data. From 2020, Netflix will stop reporting end-of-quarter free trial count.
The company forecasts operating margin to be near the lower end of its guided range of 10-11% for fiscal 2018. For the fourth quarter, operating margin is projected to be 5%, down from 7.5% in the year-ago quarter, primarily due to higher spending on content, including original movies.
Netflix continues to expect free cash outflow of $3-$4 billion for 2018.
Conclusion
Netflix’s third-quarter subscriber addition rate reflects growing appeal of the streaming platform, which is primarily driven by a solid content portfolio mix of in-house originals and licensed content. This is also helping the company steer away competition from the likes of HBO, Amazon Prime and Alphabet’s (GOOGL - Free Report) YouTube.
Moreover, partnerships with telcos like Telefonica in Spain and Latin America, and KDDI in Japan are expected to boost subscriber addition. In the third quarter, Netflix rolled out its first mobile bundle in Japan with KDDI. The company also expanded its collaboration with Verizon (VZ - Free Report) to pre-install the Netflix app on Android phones.
Further, the inclusion of Netflix into Sky’s pay-TV packages, which it expects to rollout in the fourth quarter, presents significant growth opportunity.
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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Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia and other conditions.
New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
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