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Streaming giant Netflix reported fourth quarter earnings after the close Thursday that beat on most metrics but was missed on revenue forecasts. Analysts had been pushing the stock after the rout and is up 44% in 13 days, be risk aware.

 Netflix Birdbox

 Bird Box: 45 Million viewers in the last week of 2018

Netflix Inc NASDAQ: NFLX · Reported After Close Thursday

$0.30 Beat $0.25 EPS But $4.19B Missed $4.21 Billion Revenue Forecast

Earnings

Netflix (NFLX)  Q4 earnings were EPS of 30 cents on revenue of $4.19 billion ahead of the FactSet consensus is 25 cents EPS down from 41 cents a year ago. Estimize consensus EPS estimate was 34 cents.The FactSet revenue consensus was $4.21 billion, up from $3.29 billion a year ago, and in line with the company’s guidance of $4.199 billion. Estimize forecasts revenue of $4.23 billion.

Domestic subscriber additions were 1.53 million and International subscriber additions 7.31 million,The FactSet consensus for domestic streaming revenue was $2.00 billion, for international streaming was $2.13 billion and for domestic DVD is $84.6 million. FactSet are expecting, on average, total net subscriber additions of 9.2 million, up from 8.3 million a year ago. In October, the company guided for total net additions to rise to 9.4 million.

Raymond James and UBS Upgrade NFLX Ahead of Earnngs

Raymond James analyst Justin Patterson upgraded Netflix from Outperform to Strong Buy on Friday raising his price target from $435 to $450.  Patterson wrote about Netflix that “Given underperformance in 2H18, vs.traditional media (e.g. DIS, CMCS), we believe the combination of positive revisions and emerging signs of long-term profit potential will yield share price outperformance,” Patterson said the success of “Bird Box” is confirmation that Netflix’s movie strategy is working with convenience, lower cost and global distribution to continue to gain market share in coming year.

UBS analyst Eric Sheridan upgraded Netflix from Neutral to Buy raising his price target from $400 to $410. Sheridan wrote “After six months of stock underperformance & key debates emerging about competition, margins & FCF, we think these debates are better understood by investors and reflected in the current stock price”. Sheridan said the potential to increase margins and free cash flow over time is not fully priced into Netflix stock as of yet. Despite increasing competition he says Netflix has been widening its competitive moat and remains on track to be a primary long-term secular streaming winner.

NFLX 2019 Meltup

Netflix closed higher after the news Friday, January 11, 2019.  $NFLX finished the week at $337.59 ▲ 12.93 (+3.98%). The stock is up 26% for 2019 and even more off the low from the Apple earnings sell off low 233.88 on Mon, Dec 24, 2018. Know your risk.

They key is what Netflix did to get here.

  1. What is the ASP or average selling price? ASP price rises and an improving mix of HD and 4K subscription plans are key Domestically gains are expected, the risk is how the strong US dollar impacts international subs.
  2. The cost of content is a huge component in the battle between studios.  With the 2018 content budget released in 2017 revised higher and Netflix having not told us what their content budget for 2019 is, this is a huge what if.
  3. Given the ASP and content questions the cash burn guidance is crucial. 

Last quarter Netflix reported EPS of $0.89 beating analyst estimates of $0.68 on in-line revenues of $4.0 billion adding 6.96 million subscribers globally in the quarter well ahead of consensus estimates of roughly 5.1 million adds.  For the seasonally strong Q4, Netflix guided for 9.4 million subscriber adds, well above a 7.7 million consensus. In the year-earlier quarter, Netflix earned 29 cents a share on sales of $2.98 billion. 

Netflix Inc NASDAQ: NFLX

Market Reaction After hours $340.19 ▼ 13.30 (-3.76%)

Highlights

NFLX Q4 2018 earnings

Outlook

NFLX guided toward lower-than-expected results for the first quarter of 2019. Netflix expects earnings per share of 56 cents on revenue of $4.49 billion, compared with Wall Street consensus estimates of 82 cents and $4.61 billion. Netflix previously warned content costs are more heavily weighted in the second half of the year.

Newly appointed Chief Financial Officer Spence Neumann said during the company's earnings interview that a move toward owned content has "put pressure on the cash flows of the business and the cash needs of the business over the past few years," but that the company is confident in its investment.

Netflix said it saw blockbuster hits this past quarter with original movies and scripted series like "Bird Box" and U.K.-based "Bodyguard," and rapidly accelerated viewership in unscripted content. In the unscripted content segment, Netflix branded originals account for the majority of viewership, CEO Reed Hastings said in the interview.

"You know for 20 years we've been trying to please our members, and it's really the same focus year after year. We've got all these ways to try to figure out which shows work best, which product features work best," Hastings said. "It's the same virtuous cycle: Improve the service for our members, we grow, that gives us more money to invest."

Netflix reported free cash flow for the quarter of negative $1.3 billion. The company expects its cash burn, which totaled negative $3 billion for the year, to hold consistent in 2019. After that, the company said, free cash flow will improve. 

Netflix added 29 million paid subscribers for the full year of 2018, 33 percent higher than the 22 million paid subscribers it added in 2017. Free trials accounted for 9 million global memberships during the fourth quarter. The service has seen considerable growth in emerging international markets like India and Mexico, exposing the company to certain foreign exchange headwinds. It's also been pushing into family and children's content, and it recently experimented with interactive story formats with "Black Mirror: Bandersnatch."

"There's been a few false starts on interactive storytelling in the last couple decades, and I would tell you that this one has got storytellers salivating about the possibilities," Chief Content Officer Ted Sarandos said in the earnings interview.

"We've got a hunch that it works across all kinds of storytelling." Netflix said it claims 10 percent of television screen time in the U.S. and that it counts non-television offerings like the video game Fortnite among its most serious competitors. 

Netflix is the first FANG company to release December quarter earnings.

Netflix Q3 Earnings Recap

$0.89 Beat Analysts Forecast $0.68 EPS On  In-Line $4.00 Billion in Revenue 

Earnings 

Netflix reported EPS of $0.89 beating analyst estimates of $0.68 on in-line revenues of $4.0 billion. $NFLX added 6.96 million subscribers globally in the quarter well ahead of consensus estimates of roughly 5.1 million adds.  For the seasonally strong Q4, Netflix guided for 9.4 million subscriber adds, well above a 7.7 million consensus. In the year-earlier quarter, Netflix earned 29 cents a share on sales of $2.98 billion. 

Netflix Inc NASDAQ: NFLX

Market Reaction> After hours 388.29 +41.89 (+12.09%) 

Highlights

      • Q3 operating margin was 12%, above guidance of 10.5%.
      • Netflix attributes this to the timing of content/marketing expenses.
      • Q3 subscriber additions: 6.96 million. In the same period last year, Netflix added 5.3 million subscibers
      • Total Streaming revenue grew 36% to $3.91 billion, as Netflix added 6.96 million members to make its total membership base a massive 137.10 million.
      • In the US alone Netflix earned $1.94 billion in revenue as it added 1.09 million to total memberships.

NFLX Earnings Q3 18

Outlook

      • Netflix's projects it will post $4.2 billion in revenue for Q4. Prior to the report, analysts had predicted revenue would be $4.23 billion. In the fourth quarter last year, Netflix saw sales of $3.29 billion.
      • Earnings per share, Q4 forecast of 23 cents, much less than the projected 50.4 cents a share. In the same quarter last year, it posted a profit of 41 cents a share.
      • Subscriber additions, Q4 forecast of 9.4 million. In the holiday period last year, it added 8.33 million.
      • Netflix only expects an operating margin of 5% to 7.5% in Q4.
      • For the full year, operatng margin is still expected to be at the lower end of a 10% to 11% guidance range.
      • Netflix expects its 2019 FCF to be "roughly flat" relative to 2018's FCF, which is expected to be around negative $3B. That's below a 2019 FCF consensus of negative $2.3B.

The stock has been a darling of momentum players and jumped 5.8% Friday after Citigroup analyst Mark May upgraded $NFLX to buy from neutral and reiterated a price target of $375 calling it an "opportunistic upgrade." Netflix closed at 339.56 on Friday.

The stock fell below its 200-day moving average on Thursday's sell off and still remains below its 50-day moving average  Netflix after notching a record high of 423.21 on June 21 this year the stock has fallen 24% through Thursday's close, recovering 5.8% of that on Friday. Despite the sell off $NFLX remains one of the best performers in the S&P 500 this year, up over 70%.

The risk is another miss and dump like last quarter. Macquarie Capital sums it up  “A second straight subscriber miss would likely be taken very negatively by the street, and we would expect a more protracted decline in the share price than we saw in seasonally weak Q2.”

Know your risk, stranger things have happened with this name...

Content Library and Costs

Walt Disney Co. $DIS has said it will pull its films off Netflix by 2020 end and launch it's own streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films.


Millarworld 1

Netflix has also made moves on this front with it's First Acquisition With Comic Publisher Millarworld. $NFLX planned to spend $7 billion on content in 2018.

Source: NetFlix, TradersCommunity, AlphaStreet

From The TradersCommunity Research Desk

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