Netflix Explodes To Record Highs After Smashing Subscriber Expectations, Will Burn Up To $4BN In 2018

Netflix stock is exploding higher to new all time highs, a repeat of what it did last quarter, soaring above its record high price and up over 9% after hours, rising above $247 per share after reporting Q4 numbers which while beating slightly on revenues ($3.29Bn, Exp. $3.28Bn), and in line on non-GAAP EPS (Adj. EPS$0.41, exp. $0.41), were far more remarkable for the subscriber numbers, which absolutely smashed expectations especially on the international streaming side, as follows:

  • Q4 total net streaming additions 8.34MM, Exp. 6.34MM
    • Q4 domestic net streaming additions 1.98MM; Wall Street exp. 1.29MM, guidance 1.25MM
    • Q4 international net streaming additions 6.36MM, Wall Street exp. 5.05MM, guidance 5.05MM


The addition of 8.4 million subs in Q4 was the company's largest ever quarterly increase.

Netflix' Q1 2018 outlook was also far above expectations, with the company now expecting Q1 net streaming adds of 6.35 million (1.45MM in the US and 4.9MM internationally) well above the consensus estimate of 5.18 million, although this will come at a cost: Netflix expect to burn between $3 and $4 billion in cash in 2018.

The company expects $3.686 billion in Q1 revenue, also above the consensus estimate of $3.49 billion, generating EPS of 63 cents, above consensus of 55 cents.

sdf

In addition to the stellar subscriber adds, one thing that investors will focus on is the company's content spend for next year, which Netflix is increasing once again: having previously said they would spend $7 billion, they are raising that by as much as a $500 million on the low end forecasting that "we’ll spend $7.5-8 billion on content on a P&L basis in 2018." The previous range was $7.0-$8.0 billion.

Also, it will come as no surprise that with Wall Street expecting the company to spend $8.7 billion this year on content...

asd

... it will continue spending an ungodly amount. Netflix now has 117.6 million subscribers worldwide, but the success has come at a steep price and as of Sept.30, NFLX's total content obligations were a record $17 billion.

The company's historical content spending is as follows:

  • 2018: $7.5-$8 billion (forecast)
  • 2017: $6 billion
  • 2016: $5 billion
  • 2015: $4 billion
  • 2014: $3 billion
  • 2013: $2 billion

Also, as one would expect, the company remains in its near-record cash burning ways, reporting that in Q5 it burned $523 million, modestly below the $639 million it burned one year earlier but above the $465 million it burned in Q3.

sdf

The Q4 burn brought Netflix full year 2017 FCF to -$2.0 billion, "at the lower end of the -$2.0 to -$2.5 billion range we had previously indicated." However, this means that FCF in 2018 will jump as Netflix said the calendar effect means content payments "will now occur in 2018."

It gets scarier, because as Netflix admits, "we’re growing faster than we expected, which allows us to invest more in original content than we had planned, so our FCF will be around negative $3B-$4B in 2018."

While there was no discussion of the Kevin Spacey elimination from the company's House of Cards juggernaut, Netflix did note that it took a $39m non-cash charge in Q4 for unreleased content we’ve decided not to move forward with.

Below are some more highlights from Netflix' letter, first focusing on subscribers:

In Q4, we registered global net adds of 8.3 million, the highest quarter in our history and up 18% vs. last year’s record 7.05 million net adds. This exceeded our 6.3m forecast due primarily to stronger than expected acquisition fueled by our original content slate and the ongoing global adoption of internet entertainment. Geographically, the outperformance vs. guidance was broad-based.

In the US, memberships rose by 2.0 million (vs. forecast of 1.25m) bringing total FY17 net adds to 5.3 million. ASP rose 5% year-over-year.  Internationally, we added 6.36 million memberships (compared with guidance of 5.05m), a new record for quarterly net adds for this segment. Excluding a F/X impact of +$43 million, international revenue and ASP grew 59% and 12% year over year, respectively. The increase in ASP reflects price adjustments in a wide variety of our markets over the course of 2017.

On the the domestic vs international margin, and why the first missed while the second beat:

Domestic contribution profit increased 5% year-over-year although contribution margin of 34.4% declined both on a year-over-year and sequential basis due to the marketing spend we noted in last quarter’s investor letter.

With contribution profit of $227 million in 2017 (4.5% contribution margin), the international segment delivered its first full year of positive contribution profit in our history.

On the company's guidance, and Netflix' forecast of spending $7.5-$8.0 billion on content on a P&L basis in 2018:

For Q1, we project global net adds of 6.35 million (vs. 5.0m in the year ago quarter), with 1.45m in the US and 4.90m internationally. As we wrote last quarter, our primary profit metric is operating margin and we are targeting a full year 2018 target of 10%, up about 300 basis points year over year, as in the prior year.

We believe our big investments in content are paying off. In 2017, average streaming hours per membership grew by 9% year-over-year. With greater than expected member growth (resulting in more revenue), we now plan to spend $7.5-$8.0 billion on content on a P&L basis in 2018.

We’re taking marketing spend up a little faster than revenue for this year (from about $1.3B to approximately $2B) because our testing results indicate this is wise. We want great content, and we want the budget to make the hits we have really big, to drive our membership growth. We’ll grow our technology & development investment to roughly $1.3 billion in 2018.

On competition and usage, everyone appears to be jumping in:

We have been talking about the transition from linear to streaming for the past 10 years. As this trend becomes increasingly evident, more companies are entering the market for premium video content. On the commercial-free tech side, Amazon Studios is likely to bring in a strong new leader given their large content budgets, and Apple is growing its programming, which we presume will either be bundled with Apple Music or with iOS.

Facebook and YouTube are expanding and competing in free ad-supported video content. With their multi-billion global audiences, free ad-supported internet video is a big force in the market for entertainment time, as well as a great advertising vehicle for Netflix.

Traditional media companies are also expanding into streaming. Disney is in the process of acquiring most of 21st Century Fox and plans to launch a direct-to-consumer service in 2019 with a beloved brand and great franchises. The market for entertainment time is vast and can support many successful services. In addition, entertainment services are often complementary given their unique content offerings. We believe this is largely why both we and Hulu have been able to succeed and grow.

Finally, on cash burn, Netflix expects to burn $3-$4 billion in 2018:

Our operating margins and income are rising, and our only material cash-ahead-of-P&L-expense is content. When we develop a title like Bright, the cash spend is 1-3 years before the viewing, associated membership growth, and P&L expense. Thus, the faster we grow our originals budget (particularly for self-produced content), the more cash we consume. We are increasing operating margins and expect that in the future, a combination of rising operating profits and slowing growth in original content spend will turn our business FCF positive.

In the near term, however, membership, revenue and original content spend are booming. We’re growing faster than we expected, which allows us to invest more in original content than we had planned, so our FCF will be around negative $3B-$4B in 2018. Given our track record of content investments helping to increase growth, we are excited about the growth in future years from the increased investments we are making in original content this year.

However, judging by the afterhours stock response, which sent NFXL to a new all time high with a market cap above $100 billion for the first time ever, investors are far less worried about the relentless cash burn, and the $17 billion in already accrued content commitments, and instead are are more impressed with the subscriber additions, as a result sending the stock 9% higher. And as shown on the chart below, the stock is now 30% higher YTD...

sdf

Comments

NugginFuts Mon, 01/22/2018 - 16:35 Permalink

"We're losing money for every subscriber we add, but it doesn't matter since we'll make it up on volume."

 

Since when do businesses actually need to make money?

Buckaroo Banzai DC Beastie Boy Mon, 01/22/2018 - 18:10 Permalink

Given the wide variety of subversive, anti-white (((Cultural Marxist))) content available on Netflix, one wonders whether making a profit is really even the point of the whole enterprise. Looks more like a political propaganda enterprise to me tbqh. As far as the stock price is concerned, everybody knows that actually "making money" is something to be avoided. As Russ Hanneman so eloquently observed, it's all about "ROI"-- as long as "ROI" stands for Radio on the Internet of course.

https://www.youtube.com/watch?v=BzAdXyPYKQo

 

 

In reply to by DC Beastie Boy

cheech_wizard Magnix Mon, 01/22/2018 - 17:28 Permalink

Especially when there are so many other sites out there that do.
It has been my experience that newly released movies can be found within 48 to 96 hours of their release.
As for television programs, generally an hour after they air (if it has a general audience following) up to 48 hours for more obscure shows.

In reply to by Magnix

hannah NugginFuts Mon, 01/22/2018 - 17:07 Permalink

i stream for free.....i can find almost anything for free movie wise on the intertubes. someone had 'the last jedi' online on the saturday it opened in the the theaters because they ran it in europe first......now it was shot with a camcorder (like kramer did..) and it might have been in a porny theater but it had like at least 80% of the screen most of the time ...except for the lady with her head in everyones lap..?

In reply to by NugginFuts

NAchodwarf Mon, 01/22/2018 - 16:39 Permalink

My 16 and 17 year old told me last night - "I actually like Amazon Prime more than Netflix - it has more to watch" So Thanks Apple for getting over it so my kids can continue to watch SpongeBob and not do homework. Winter is Coming. 

RAT005 dirtyfiles Mon, 01/22/2018 - 17:10 Permalink

My experience with Amazon Prime is that it sucks.  They reminded me I still had it when I saw headlines the monthly fee was increasing.  Suspect there is some fine print somewhere that says they can take what they want each month without confirming with me.  I'm quitting before mid Feb price increase.  They just screwed up last order.  Prime didn't move for 48hrs then went via Amzn courier as was delivered half day latter than expected in metropolitan area.  I quickly ordered Friday around 3pm so it would be delivered Monday morning.  Doesn't seem like much but I only purchase a couple things per month so I kind of pay $5 per order for them to not sit around doing nothing for over 48 hrs while they claim fast delivery.

They moved the app off google play so it is constantly out of date and can't be updated if I keep download security on.  No need for this, they are playing games.  Almost everyday I get a notice the ap is out of date and needs update.  I did a couple times because I thought I had to and it was a mess each time fighting with security.  Then the movie selection available is crap.  I probably haven't  watched one for over 4 months.

In reply to by dirtyfiles

cheeseheader Wage_Slave Mon, 01/22/2018 - 20:22 Permalink

Not owning an Idiot Box...what's netflix?

/s

 

Oh man oh man I'm so glad I don't have to waste my precious time thinking about Hollywood (and filling their pockets).

 

Btw, you teevee watchers could use a good new 'content' program called...Disappearing Act.  Each week could feature a one-off prominent anti-american lefty.

 

In reply to by Wage_Slave

Full Court Lug… Mon, 01/22/2018 - 16:47 Permalink

You'd think the exciting thing about beating on subscribers would be the extra revenue... but revenue was merely in line with expectations. What's the value of getting more customers if revenue doesn't go up correspondingly?

Other than that, what's the growth strategy here that merits trading at 150x earnings? It sounds like it's all increased competition and skyrocketing content costs as far as the eye can see. Are people actually excited about this company anymore, because as far as I can tell people are actually getting a little sick of it.

Seems like Amazon Redux: we have lots of customers so our stock deserves a stratospheric valuation even though we're a mature 20-year-old company that barely makes any profits.

adr Full Court Lug… Mon, 01/22/2018 - 17:39 Permalink

I like that my entire family living in six different locations is using one Netflix account.

I think my brother in law's mom is the one who is actually paying for it.

To tell you the truth I think his four brothers are also using the same account.

It seems Netflix doesn't care so neither do I. I never watch Netflix anyway. My son watches some cartoons.

In reply to by Full Court Lug…

beyondtheprogramming Mon, 01/22/2018 - 17:02 Permalink

Here's the real story:

Serials of all types (including finance, weather, politics and current events) have proven to be an ENORMOUS money maker.  LameStream Revenue has totally tanked so the Chinese are buying up those industries. Here ya go - Serial Binge Watching. The interactive Bernays Sauce - dripping completely over the NLP top. All we need to add now is the Comments Section, so the muddled hasses can argue over which characters / plot lines they've emotionally bonded with. Programming Complete.

Are you ready to sign up yet?

Consuelo Mon, 01/22/2018 - 17:41 Permalink

 

 

You know that feeling you get when on holiday, or away from work where there are no 'connections', and how after about a day (for me it's before I even get there...), the need/desire/compulsion/addiction, etc., to 'connect' simply disappears...?

I think there might be a message there somewhere...