Netflix shares rise slightly despite weak guidance, domestic subscriber miss


Shares of Netflix climbed as much as 2.3% in after-hours trading on Tuesday after the company reported fourth-quarter results. The company beat on the top and bottom lines for the quarter, but gave disappointing guidance for the first quarter.

Here are the key numbers:

  • Earnings per share: $1.30 per share, however that’s not comparable to Refinitiv estimates
  • Revenue: $5.47 billion vs. $5.45 billion expected, per Refinitiv
  • Domestic paid subscriber additions: 550,000 vs. 589,000 expected, per FactSet estimates
  • International paid subscriber additions: 8.33 million vs. 7.17 million expected, per FactSet

For the first quarter of 2020, Netflix expects to report earnings of $1.66 per share on revenue of $5.73 billion. That’s compared to analyst expectations for earnings of $1.20 per share and $5.76 billion in revenue. The company also expects to add 7 million paid customers in the first quarter, which fell short of analysts expectations for 7.86 million subscribers.

The company reported negative free cash flow of $1.7 billion for the quarter and expects to see negative free cash flow of about $2.5 billion for 2020. Netflix reiterated that its cash burn peaked in 2019 and said it’s now moving slowly toward being free cash flow positive in the future.

“We’re on the glide path, slowly, towards positive free cash flow,” Netflix CEO Reed Hastings said on the company’s earnings call. “We’re excited about that but that’s not coming from shrinking back our content spending. That’s coming from the increase in revenue and operating income.”

In the company’s letter to shareholders, Netflix cited recent price changes as a reason for low membership growth in the U.S. and Canada, along with recent launches of rival streaming platforms. The company said it has seen a “more muted impact” from competitive launches outside the US. However, streaming services from competitors like Disney have yet to launch globally.

“As always, we are working hard to improve our service to combat these factors and push net adds higher over time,” the company said.

Hastings reiterated on the company’s earnings call that Netflix has no plans to incorporate advertising, as it’s focused on “streaming and customer pleasure.” Hastings added that Netflix would face an uphill battle if it were to compete with the likes of Facebook, Google and Amazon, which dominate the digital advertising market thanks to targeted ads informed by customer data.

“Instead, we think if we don’t have exposure to that … we’re in a much more positive place,” Hastings said on the call. “We’re not integrating everybody’s data, we’re not controversial that way. We’ve got a much simpler business model.”

The company is also changing how it measures the number of households that watch content on the platform. Previously, Netflix counted a view if a household watched 70% of a single episode or of an entire film.

Now, Netflix said it will count a view as any account that has watched TV shows or films for at least two minutes, which is “long enough to indicate the choice was intentional.” The company said this methodology is similar to the one used to calculate view counts on YouTube videos and content watched in BBC’s iPlayer.

Using this metric, Netflix said its new fantasy series, “The Witcher,” was watched by 76 million households in the first month of its release, making it Netflix’s biggest series premiere yet.

Netflix included a chart of global Google search trends, comparing searches for its original series “The Witcher” with Apple‘s “The Morning Show” and Disney’s “The Mandalorian.” The company said searches for “The Witcher” were much higher than its rivals, indicating high interest in its original shows. However, “The Mandalorian” isn’t available yet globally, making the chart slightly misleading.

The fourth quarter marks Netflix’s first earnings report since the launch of new rival streaming services last fall. Analysts will be paying close attention to see if Disney+ and Apple TV+, which launched last November, will have any impact on Netflix’s results.

The streaming wars are expected to heat up even further when AT&T‘s WarnerMedia launches HBO Max in May and Comcast‘s NBCUniversal rolls out Peacock in the U.S. on July 15. So far, Netflix has said it welcomes the new competition.

Disclosure: Peacock is the streaming service of NBCUniversal, parent company of CNBC. Comcast is the parent company of NBCUniversal.

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