Netflix Q1 Strength Overshadowed by Weak Guidance

April 16, 2019

By Spencer Feingold

Netflix brought in $4.52 billion in revenue and gained an additional 9.6 million paid subscribers in the first quarter of 2019, beating expectations, the company said in a note to shareholders.

The earnings report, which was released after markets closed Tuesday evening, was highly anticipated by investors eyeing the increasingly crowded space of streaming entertainment. In recent weeks, both Disney+ and Apple TV+ were launched and have been seen as potentially competing platforms.

Netflix ($NFLX) said its year-over-year total revenue growth was 22 percent last quarter but that average revenue per user decreased 2 percent “due to currency headwinds.” Of the 9.6 million new paid subscribers, 1.74 million were in the U.S. and 7.86 million were from around the world; the user growth represented a 16 percent year-over-year increase.

Despite the revenue growth, Netflix’s stock initially fell nearly 4 percent in after hours trading Tuesday, due mainly to a lower than expected earnings per share (EPS) prediction for Q2. The company forecast an EPS of $0.55, down from the $0.76 in Q1. The stock later pared some of those losses.

The streaming giant also directly addressed the new competition from Disney ($DIS) and Apple ($AAPL) in its earnings report.

“Both companies are world class consumer brands and we’re excited to compete,” the report read. “We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on demand entertainment is so massive and because of the differing nature of our content offerings.”

Netflix also noted that its platform makes up only 2 percent of all global downstream mobile internet traffic.

“They’re basically saying there is a lot of space and a lot of room to grow,” Ray Wang, a principal analyst at the markets firm Constellation Research, told Cheddar.

Other experts note that while Disney+ and Apply TV+ may pose a challenge for Netflix, they are not extraordinary threats.

Disney could “certainly have an impact on Netflix's growth over … a short term period,” Andy Hargreaves, an analyst at KeyBanc, told Cheddar. But “longer term Netflix remains really differentiated.”

“Hulu is more competitive, or at least a more competitive threat than Disney+ because it is aiming at that broad, general entertainment viewing behavior that Netflix targets so effectively,” he added.

Investors are also closely watching Netlix’s prices changes. Disney+ announced its service will cost $6.99 a month. Netflix plans start at $8.99 a month, but the most popular plan is $12.99.

“If Netflix can justify its own value, it can continue to drive the prices higher and I think right now, they provide enough content to certainly justify a higher price,” Hargreeaves said.

In its Q1 report, Netflix also reported a net cash flow of negative $380 million and said it expected its total 2019 free cash flow deficit to be negative $3.5 billion dollars, slightly higher than earlier predicted. The company said the increased expenses are due to changes in its corporate structure as well as real estate and infrastructure investments.

Netflix also announced its chief marketing officer, Kelly Bennett, will retire after serving for seven years in the company.