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Netflix 4Q18 results mixed

Netflix reported 4Q18 results on Thursday (17 January), with EPS coming in above expectations at USc30 (-27% YoY) vs a Refinitiv consensus forecast of USc24, while revenue of $4.19bn (+28% YoY) was below the Refinitiv consensus estimate of $4.21bn.

For the quarter, domestic (US) subscribers increased by 1.53mn above the 1.51mn FactSet had forecast, while international subscriber additions were 7.31mn vs the 6.14mn FactSet forecast. For FY18, Netflix added 29mn paid subscribers – higher than the 22mn paid subscribers it added in FY17.

Negative free cash flow for the quarter rose to $1.3bn vs $524mn in 4Q17 and the firm said that it expects its cash burn, which totaled a negative $3bn for the year, to hold in 2019. After that, it said cash flow will improve.

Interestingly, Netflix now claims 10% of total television screen time in the US.

In mid-January, Netflix announced price hikes of between 12.5% and 18% for all its US customers and, in the wake of the price hike, the company said it expects to add 1.6mn US streaming paid additions in 1Q19, slightly below a 1.86mn consensus. It also forecasts 7.3mn international paid net adds, which is above a 6.37mn consensus forecasts. We believe the price hikes demonstrate that Netflix has enormous latent pricing power. We can’t think of too many products or services that could raise prices to such a degree, particularly in an environment that is disinflationary (ironically, Netflix has itself been a disinflationary force). It is also a sign of management’s confidence that consumers will absorb the price hike and churn won’t be significant. Consumers understand the deal they’ve inherently struck – pricing is well below what Netflix could charge (in absolute terms and relative to alternative sources of entertainment) – when Netflix increases pricing, it reinvests in content to improve the service and the value proposition and, even after the price hikes, the service is outstanding value for money.

Looking ahead, the firm guided toward lower-than-expected results for 1Q19. Netflix expects EPS of USc56 on revenue of $4.49bn, compared with consensus estimates of USc82 and $4.61bn, respectively.

On Tuesday (22 January), Netflix announced that it had earned admission to the Motion Picture Association of America (MPAA), the global trade association that advocates on behalf of the film and television industry. Netflix Chief Content Officer, Ted Sarandos said that joining the MPAA “… further exemplifies our commitment to ensuring the vibrancy of these creative industries and the many talented people who work in them all over the world, …”. In addition, it was also announced on Tuesday that Netflix had received 13 Oscar nominations for its film, Roma – the first Best Picture nominee with no reported box-office grosses.

The Netflix share price is down c. 8% since it released its latest set of results but is 21.5% higher YTD (to Tuesday’s close).



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