Netflix numbers disappoint, but international growth exceeds expectations

Netflix’s fourth-quarter earnings did not yield the stellar results widely anticipated, but analysts have told DTVE sister publication TBI that the business’s stagnation in the US, discussion of pay TV relationships and glimpse into viewership figures provide key clues about its strategy for the year.

The streaming giant posted revenues of US$4.19 billion (€3.68 billion), and finished 2018 with 139 million paying memberships, up 29 million from the start of the year. Overall, it boosted paying memberships by 8.8 million – up 1.5 million in the US and 7.3 million internationally.

However, revenues were slightly under the US$4.2 billion forecast set by analysts, and although international subs additions (7.3 million) exceeded the forecasted 7.2 million, domestic subscriber additions of 1.5 million came in well under the predicted 1.8 million.

Guy Bisson, research director of UK-headquartered Ampere Analysis, told TBI that the results reveal an “expected and positive” story around international, which now represents around 60% of Netflix’s subscriber base. “Their international growth is about 1.2 million subs over their own forecast of 6.1 million, so that’s clearly where the future lies,” he says.

Bisson reasons that the lacklustre US performance is expected due to a saturated market, but pointed out that the outcome on Netflix stock is telling: while the platform’s share price soared following its price hike earlier this week – its largest price increase yet – shares fell about 3% in after-hours trading following the earnings report.

“The share price dropped because they only met the target in the US and didn’t exceed it, and this is Wall Street, so that domestic market is the centre of their universe,” he says.

However, Bisson argued that one of the most revealing elements of Netflix’s results is its discussion in a letter to shareholders of partnerships with pay- TV operators and bundled offerings with the likes of Telefónica in Spain, Comcast and T-Mobile in the US, Sky in the UK and Germany, Free in France and KDDI in Japan.

“That will be something to watch in coming years because the next step in the evolution is the reaggregation of these platforms. Everything is coming full circle,” says Bisson.

Similarly, tech, media and telco analyst Paolo Pescatore said that leveraging those relationships is a “win-win” for the business, which will expand these partnerships in their strongest markets.

“It will be key to their success in growing their subscriber base. As they move to more countries, they need to leverage those ties. In the UK, they have worked with all telcos basically and their subscriber base here is a testament to those relationships,” he says.

“Expect more of them and deeper integration, particularly with cable and pay TV players. Deals with Comcast on Xfinity and Sky are a breakthrough and we will see more of those in other markets.”

Ampere Analysis predicted last year that Netflix would up their prices by around US$1.67 – a prediction that was largely in line with the US$2 hike revealed earlier this week.

Bisson said that the price increase will reduce the negative free cash flow that has been “the big red flag in their finances to date”.

Results indicated that free cash flow was -US$1.3bn versus -US$0.5bn in Q4 2017. Netflix said it expects 2019 “will be similar to 2018 and then will improve each year thereafter”.

“This FCF improvement will be driven by growing operating margin, which will allow us to fund more of our investment needs internally,” the business outlined.

Bisson said: “They have said that won’t come down this year, but will do in 2020. So, with the competitive headwinds coming this year with Disney+, WarnerMedia and Apple, I’d expect them to have a real push around original content and start to benefit from that price rise.”

Going forward, Netflix has forecast revenues of US$4.5 billion for Q1, along with global net subs additions of 8.9 million and an EPS of US$0.56.

Viewership

Netflix made some rare disclosures about their viewership figures in its results, noting that it “estimated Bird Box will be enjoyed by over 80 million member households, and we are seeing high repeat viewing”.

Meanwhile, Spanish original Elite, which is now in production on a second series, was seen in more than 20 million member households in its first month on the platform.

Interestingly, the business also said that BBC One co-production Bodyguard, Italian original Baby and its debut original out of Turkey, Protector, “saw strong viewing both inside and outside their home countries” and were enjoyed by more than 10 million member households in their first month on Netflix.

Meanwhile, thriller You – a co-production with A+E Networks-owned US cable channel Lifetime – is on track to reach more than 40 million households in its first month.

In what is a revealing sign of Netflix’s aggressive push for content for its Originals banner, the second series of the hit show will come solely from the SVOD provider, after Lifetime pulled out of a second series commission due to low ratings on the network.

Ampere’s Bisson, however, said that the industry should not read too much into the “odd viewership figure here or there” from Netflix.

“They won’t release any viewing or consumption measure on a consistent basis. Bird Box was such a high-profile title on Netflix and other social platforms that it makes good headlines to release a figure around that, but this is not a shift around them starting to be transparent around their viewing. It’s not in their interest.”

Pescatore said that a few viewership stats could be intended to “shift the focus away” from subscriber metrics, which were down domestically in Q4.

“What they are trying to show is that people are actively engaged to using the service, which to a certain extent justifies the pricing increase. What will be interesting moving forward is whether the price hike will see a drop-off in the US pay base,” he says.

“That’s the interesting point, whether that viewership correlates with the US subscriber base.”

Content and competition 

The business outlined that as a “result of our success with original content, we’re becoming less focused on second-run programming”.

“We launched our originals strategy for the unscripted genre only two years ago. Today, Netflix originals, like Tidying Up with Marie Kondo, account for a majority of total unscripted view share on Netflix, while viewing of all unscripted programming has increased meaningfully during that time.”

Netflix said it is ready to pay top-of-market prices for second-run content when the studios, networks and producers are willing to sell – best exemplified by the landmark Friends deal with WarnerMedia – but is also “prepared to keep our members ecstatic with our incredible original content if others choose to retain their content for their own services”.

Meanwhile, the business boasted that it earns around “10% of television screen time” in the US.

“In other countries, we earn a lower percentage of screen time due to lower penetration of our service. We earn consumer screen time, both mobile and television, away from a very broad set of competitors.

“We compete with (and lose to) Fortnite more than HBO. When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time. Hulu is small compared to YouTube for viewing time, and they are successful in the US, but non-existent in Canada, which creates a comparison point: our penetration in the two countries is pretty similar.”

Netflix said that, amidst “thousands of competitors in this highly-fragmented market”, its growth is “based on how good our experience is, compared to all the other screen time experiences from which consumers choose. Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members”.

New titles for 2019 highlighted by the platform include The Umbrella Academy (15 February); Triple Frontier from J.C. Chandor (March); The Irishman from Martin Scorsese; 6 Underground from Michael Bay; and The Politician from Ryan Murphy; as well as returning seasons of The Crown led by a new cast including Olivia Colman, Ben Daniels, and Helena Bonham Carter; 13 Reasons Why, La Casa de Papel, Elite, and series three of Stranger Things (4 July).