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Netflix (NFLX) Q1 Earnings Beat, Revenues Up on User Growth

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Netflix (NFLX - Free Report) reported first-quarter 2019 earnings of 76 cents per share that crushed the Zacks Consensus Estimate by 19 cents. The figure increased 18.8% year over year and was much better than management’s guidance of 56 cents.

Earnings included a $58-million, non-cash unrealized gain from foreign exchange remeasurement on Netflix’s Euro denominated debt.

Revenues of $4.52 billion beat the consensus mark and management’s guidance of $4.49 billion. The top line increased 22.2% year over year, driven by a solid 23.3% jump in streaming revenues from a year ago.

Netflix added 9.6 million subscribers, better than the guidance of 8.9 million and 16.2% higher year over year, primarily driven by strong growth in international markets.

Shares were down almost 1% in after-hour trading, apparently due to weak guidance for U.S. streaming paid net additions for the second quarter of 2019.
 

Netflix, Inc. Price, Consensus and EPS Surprise

Netflix, Inc. Price, Consensus and EPS Surprise | Netflix, Inc. Quote

 

Subscriber Addition Strong on International Growth

The International Streaming segment recorded 88.63 million paid members that surged 38.9% from the year-ago quarter. The company added 7.86 million paid members, better than management’s expectation of 7.3 million.

In the U.S. Streaming segment, Netflix’s paid subscriber base totaled 60.23 million, up 9.3% from the year-ago quarter. The company added roughly 1.74 million paid subscribers, slightly better than the guidance of 1.6 million.

At the end of the quarter, Netflix had 148.86 million paid subscribers globally, up 25.2% from the year-ago quarter.

ARPU declined 2% year over year due to currency headwinds. Excluding the unfavorable foreign exchange impact, global streaming ARPU improved 3% year over year and 2% sequentially.

Price increases in the United States, Brazil, Mexico and parts of Europe were announced in January this year. Although gross additions in the United States has been unaffected, Netflix observed a modest increase in churn rate.

Original Content Expansion Continues

Netflix’s expanding original content portfolio is a major growth driver.

For the second half of 2019, the company’s content slate looks pretty engaging. Netflix is now focusing on originals instead of 2nd run programming. Titles include Season 3 of the Stranger Things (Jul 4), 13 Reasons Why, The Crown, La Casa de Papel, Orange is the New Black and the much anticipated movies from Michael Bay (Six Underground) and Martin Scorsese (The Irishman).

Launched in early April, nature documentary Our Planet is expected to be watched by 25 million member households in the very first month of its release.

In the reported quarter, Netflix released Umbrella Academy, which has been watched by 45 million member households within the first four weeks of availability on the platform.

Triple Frontier, starring Ben Affleck and directed by J.C. Chandor, has been watched by more than 52 million member households within the first four weeks of release. Moreover, The Highwaymen is set to be viewed by more than 40 million member households in the first month of release on Netflix.

The company’s documentary feature FYRE: The Greatest Party That Never Happened has been watched by more than 20 million member households in the first month of release.

Netflix released unscripted program ¡Nailed It!: Mexico on Feb 8. The company also launched Korean original series, Kingdom, in January. Durante la Tormenta, a Spanish language original film, was also launched in the quarter.

Content strength is helping Netflix win awards. Roma won an Oscar in the Best Foreign Language Feature category. Director Alfonso Cuarón won the Oscar for Best Director.

Quarter Details

International Streaming revenues (52.4% of revenues) rallied 32.8% year over year to $2.37 billion.

Domestic Streaming revenues (45.9% of revenues) improved 14% from the year-ago quarter to about $2.07 billion.

The DVD business revenues (1.8% of revenues) declined 18.3% year over year to $80.7 million.

Marketing expenses increased 14.9% year over year to $616 million. However, as percentage of revenues, marketing expenses decreased 90 basis points (bps) to 13.6%.

Consolidated contribution margin (revenues minus the cost of revenues and marketing cost) contracted 50 bps on a year-over-year basis to 22.9%. While International Streaming contribution margin expanded 180 bps, U.S. Streaming contracted 40 bps.

Moreover, consolidated operating income increased 2.8% year over year to $459.1 million. Consolidated operating margin contracted 190 bps on a year-over-year basis to 10.2%, slightly better than management’s guidance of 8.9%.

Balance Sheet

Netflix had $3.35 billion of cash and cash equivalents as of Mar 31, 2019, compared with $3.79 billion as of Dec 31, 2018.

Long-term debt was $10.31 billion, down from $10.36 billion at the end of the previous quarter. Streaming content obligations were $18.9 billion compared with $19.3 billion at the end of the previous quarter.

Netflix reported free cash outflow of $460 million compared with $287 million in the previous quarter.

Guidance

For the second quarter of 2019, the company forecasts earnings of 55 cents per share, reflecting a year-over-year decline of 35.3%. The Zacks Consensus Estimate is pegged at 83 cents.

Netflix expects to add 5 million paid subscribers, down 8.3% year over year. In the U.S. Streaming segment, the company anticipates to gain 0.3 million subscribers, down 65.5% from the year-ago quarter. However, in the International Streaming segment, Netflix expects paid subscriber addition of 4.7 million, up 2.6% year over year.

The company expects to have 153.86 million paid subscribers globally, up 23.7% from the year-ago quarter.

Streaming ARPU is expected to grow more than 2% sequentially. Excluding unfavorable impact of currency, Netflix expects streaming ARPU to increase 7%.

Total revenues, including the DVD business, are anticipated to be $4.93 billion. The figure reflects more than 26% growth on a sequential basis. Excluding unfavorable impact of currency, Netflix expects total revenues to increase 32%.

The U.S. and International streaming revenues are expected to be $2.28 billion and $2.58 billion, respectively.

Operating margin is projected at 12.5%, up from 11.8% in the year-ago quarter.

For 2019, Netflix reiterated operating margin guidance of 13%. Management expects second half operating margin to be higher than the first half.

Moreover, Netflix expects 2019 free cash outflow to be modestly higher at roughly $3.5 billion due to higher cash taxes related to the company’s change in corporate structure, and additional investments in real estate and other infrastructure.

The company expects free cash flow to improve in 2020 and each year after that, driven by growing user base, revenues and operating margins.

Conclusion

Netflix’s first-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 (T - Free Report) HBO, Amazon Prime video and Alphabet’s (GOOGL - Free Report) YouTube.

Moreover, Netflix doesn’t expect the newly unveiled streaming services from Apple (AAPL - Free Report) and Disney (DIS - Free Report) to hurt its growth rate, primarily due to content strength. Further, the company believes that mobile presents solid growth opportunities.

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

However, the price increase is expected to hurt net subscriber additions in the United States. Moreover, cash burn rate is expected to increase in 2019.

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

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