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Netflix 3Q18 earnings impress

Netflix reported 3Q18 results on Tuesday (16 October), which saw the firm crushing earnings estimates. At $4bn (vs 3Q17’s $2.98bn), revenue was in-line with Thomson Reuters consensus estimates, but earnings per share (EPS) of USc89 (vs 3Q17’s USc29) was well above the USc68 estimate. The streaming service also saw subscriber additions of 6.96mn in 3Q18 and guided for as many as 9.4mn new adds from October to December (4Q18) – 1.8mn in the US and 7.6mn in international markets. Domestic subscriber growth came in 61% above estimates, while international growth topped forecasts by 1mn-plus. The record number of 3Q18 additions brings Netflix’s customer base to 137mn globally. Streaming revenue increased 36% YoY in 3Q18, although international revenue was down $90mn due to YoY currency impact.

The company’s third-quarter results were boosted in part by several one-time accounting items including a $8mn gain from remeasuring its euro-denominated bonds and a $38mn tax benefit that was a result of last year’s tax law. These together accounted for c. USc10 of its USc21/ share earnings beat, according to Reuters.

Netflix also benefited from signing up lots more new subscribers than it expected – its final tally for the quarter was 2mn higher than it had forecast.

Despite the impressive results and better-than-expected reported earnings, Netflix is still burning through cash. In 3Q18, free cash flow ran in the red, to c. $859mn. That was up from a deficit of $465mn in 3Q17. Netflix said expects its negative free cash flow for the year to be between $3bn and $4bn (though more likely closer to the former, according to the company).

Because of content costs, Netflix forecasts its operating margin to plunge, from 12% of revenue in the just-completed quarter to 4.9% in 4Q18. Netflix still expects to post a full-year operating margin of between 10% and 11% of sales.

Netflix’s share price is up c. 78% YTD and jumped c. 14% to $394.25 in after-hours trading yesterday (16 October).



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