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Jan 18, 2019

Netflix growth falls short as programming fails to hook viewers

Netflix investors hit pause after disappointing quarter

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Netflix Inc.’s (NFLX.O) “Bird Box,” “You” and other new programs helped attract millions more subscribers to the streaming service last quarter. But slower sales growth disappointed investors riding high on a 50 per cent stock gain in recent weeks.

While revenue grew 27 per cent to US$4.19 billion in the fourth quarter, that came up short of the US$4.21 billion projected by Wall Street. The forecast for current-quarter sales also missed estimates. Netflix shares were down 3 per cent in premarket trading at 4:50 a.m. in New York.

The results suggest that Netflix’s unprecedented spending spree on new movies and shows may not pay off as quickly as expected -- despite the buzz for hugely popular hits like the horror movie “Bird Box,” which was seen by 80 million subscribers.

The online entertainment company said Thursday that paid memberships increased by 8.84 million in the fourth quarter, beating its own forecast made in October. It predicted a record 8.9 million new customers worldwide in the current first quarter, but that’s up only slightly from the period just ended.

“Management is taking a cautious tone,” said Geetha Ranganathan, an analyst at Bloomberg Intelligence. The light subscriber forecast for the current quarter is partly the result of the price increase Netflix announced Tuesday. “The long-term investment story remains intact given overseas additions are projected to rise 22 per cent,” she said.

Cash Flow

Netflix is racing to keep its huge lead in an increasingly crowded field of streaming services, with competitive offerings coming from Walt Disney Co. and AT&T Inc.’s WarnerMedia later this year. The company’s long-term programming budget stood at US$19.3 billion at year end, up from $18.6 billion three months earlier.

“There’s a billion hours of television content being consumed today -- we’re winning about 10 per cent of it,” Chief Executive Officer Reed Hastings said in an online Q&A. “We don’t get so focused on any one competitor and really think our best way is to win more time by having the best experiences.”

Netflix’s operating margin -- an indication of its ability to turn sales into profit -- shrank in the quarter, because of the heavy load of titles released. In addition to “Bird Box,” 40 million households watched a series called “You,” about a stalker. The top unscripted show was the much-talked-about program on housecleaning called “Tidying Up with Marie Kondo.” The company also called out the successes of content overseas from Turkey and the U.K.

For this year, Netflix expects negative cash flow of about $3 billion, in line with 2018. The losses will start to shrink thereafter, the company said.

The slower-than-expected growth will put more of the spotlight on a recent price increase. The Los Gatos, California-based company said this week it was hiking its rates by $1 to $2 a month in the U.S.

Still, most of Netflix’s growth is coming from overseas. The company believes that international markets will one day account for as much as 90 percent of its customer base. The company signed 7.31 million new paid customers outside the U.S. in the fourth quarter, or about 83 percent of all new subscribers.

Netflix’s investment in original content starting six years ago was a bet that studios and networks would eventually look to do their own streaming, said Ted Sarandos, chief content officer. The service still has plenty of second-run programs, he said, but the momentum has shifted toward its original fare.

“We have shows like ‘Grey’s Anatomy’ or ‘Friends,’” he said. “But if you stack all of the viewing -- like Top 50 or Top 25 most watched shows, by seasons, or by series -- it’s dominated primarily by our original content brands.”

Profit for the fourth quarter came to 30 cents a share, beating the 24-cent average of analyst estimates. This quarter, the company is predicting earnings of 56 cents, short of the 85-cent average Wall Street forecast. The company said sales will be US$4.49 billion, compared with analysts’ projections of US$4.6 billion.

Despite the shaky stock reaction, Raymond James analyst Justin Patterson sees more positives than negatives.

“Overall, 2019’s off to a positive start,” he said in a note.