Netflix impresses with first-quarter subscriber growth

First-quarter results from online streaming company Netflix impressed analysts with revenues and earnings, sending the stock higher in after-hours trading.

Netflix’s success is measured in the number of new subscribers and in the first quarter of 2018 it reported 7.4m new customers globally, beating its own forecast for 6.35m new subscribers for the period. US-based subs of 1.96m in the quarter was 3% ahead of Wall Street's expectations, while international adds of 5.46m was 9% better than the Street.

Guidance for the second quarter was also well above analysts' expectations, with Netflix guiding to 1.2m of domestic subs and 5m overseas, which was 23% and 19% respectively more than Wall Street's abacus crunchers.

Netflix reported profits of $290.1m in the quarter, at 64 cents a share, from revenues of $3.7bn, up 40% on the same period last year. EPS was in line with the consensus estimate, as compile by Reuters, while the revenue consensus of $3.69m was just bested.

"We've outperformed the business in a way we didn't predict. The business has grown faster than we expected,” said David Wells, Netflix's chief financial officer.

As for financial predictions for the second quarter of the year, Netflix expects revenues of $3.9bn just ahead of the Street's estimate at $3.89bn.

The company also gave an insight on its future spending to create new content. It expects to spend $7.5-8bn in new series and films this year, with new content designed to be varied and diverse to satisfy the tastes of “our growing global membership base”.

Investment is going towards such TV franchises such as 'Marvel's Jessica Jones', 'Grace and Frankie', and 'A Series of Unfortunate Events' and 'Queer Eye'. Netflix also hailed new showrunning talent, such as Shonda Rhimes and Jenji Kohan, for their "proven track record of success" that has allowed Netflix to cut back "reliance on third-party studios".

Chief content officer Ted Sarandos denied reports that the company's move into topical interview shows was presaging a shift into news production.

"Our move into news has been misreported over and over again. We're not looking to expand into news beyond the work that we're doing in long-form and short-form documentary," he said. "Topical interview shows, absolutely, but keep in mind, those are entertainment."

Analysts at RBC Capital Markets said they believe secular demand for Internet TV is "ramping rapidly globally, and Netflix has positioned itself extremely well to benefit from this".

Pricing power helps, the analysts said, adding that the breadth of the company's content offering is "paying dramatic dividends" in terms of subscriber adds and retention, with each $1 of monthly subscription paid to Netflix gives a user access to $1.1bn of content spend, almost two times the ratio of most media companies.

Increased marketing spend and distribution partnerships, such as T-Mobile, Sky, Comcast, are also helping. "And the scale advantages of the business model are proving out – US streaming gross margin now [at a] record-high 51%."

RBC, which upped its target price to $360, increased its 2019 revenue forecasts 2% to $19.8bn, with operating income up 7% to $2.71bn.

"Global streaming revenue growth should accelerate from 36% in ’17 to 40% in ’18E," analysts said, noting that operating margins are ramping and that its assumptions "may be conservative" as global sub adds in H1 appear on track to be over 30% higher than last year's and content and marketing costs are expected to be back-end loaded in 2018.

Joshua Owen, Trader at Ayondo Markets, said the emerging markets assault was key, but that the major headwind will always be the cost of content.

“Stimulating further subscriber growth along with reducing the cost of content creation seems to be the strategy going forward. Recently announced partnerships with Sky and Comcast seems to be a push to consolidate its position within developed markets. However, it’s the push into emerging markets where favourable demographics and a growing middle-class will be key if Netflix are to continue their stellar growth," he said.

“Partnering internet service providers and mobile operators, taking innovative approaches to remote data usage and creating relevant content to international consumers will drive success within developing markets. The headwind to Netflix has, and will always be the cost of content. Furthermore, a rapidly-expanding, international consumer base would likely see these costs continue to soar adding further stress to the well documented cash-burn of the company, hence a robust pricing strategy will be paramount."

As well as this, Owen said China presented a slightly different challenge, as Netflix sells content to iQIYI, dubbed the ‘Chinese Netflix’, which is a route into the region and could in fact reduce the net cost of content. "However, could Netflix be in danger of being ‘out-Netflixed’ in the world’s largest consumer market?”