Netflix Reports Solid Q4 Growth, But The Spending Spree on Originals Isn't Paying Off Quickly Enough

Netflix’s video streaming service added more subscribers than ever during the crucial holiday season, but the company signaled its growth is slowing in the U.S. as it begins to roll out double-digit price increases in its biggest market. The slightly disappointing forecast issued Thursday for the opening three months of the new year overshadowed a solid earnings report covering the final quarter of last year — a key period for Netflix because subscriptions to its service are a popular holiday gift.

Netflix ended December with 139.3 million paid subscribers, slightly better than analysts had anticipated, according to FactSet. Of that total, 58.5 million were in the U.S., in line with what Netflix had projected. Management predicted the company will gain another 8.9 million subscribers from January to March, but only 1.6 million are expected in the U.S. That is down substantially from an increase of 2.3 million paid U.S. subscribers at the same time last year.

That downturn in the U.S. raised alarms because Netflix is starting to raise its prices in the country by 13 to 18 percent this quarter, a move that the company is making to help pay for its rising programming costs as it competes for exclusive series and films against Amazon, Hulu, AT&T and Apple. By charging more, Netflix can continue “a virtuous cycle where you’ve got the more investment you’re putting in, the more people are finding content that they love and the more they have value in the service,” said Ted Sarandos, the company’s chief content officer, during a Thursday webcast.

But the higher U.S. prices also threaten to cause some existing subscribers to cancel the service and discourage potential new customers from joining. That phenomenon could undercut the subscriber growth that propels Netflix’s stock price more than any other factor. Netflix’s shares fell nearly 4 percent to $340 in Thursday’s extended trading after the earnings report and forecast came out. Even so, the stock remains above its levels before the company announced the U.S. price increase earlier this week, a sign that more investors believe management is doing the right thing for the company’s long-term financial health as it continues to burn through more cash than it is bringing in. “The fact that investors reacted negatively to what amounted to a strong performance indicates the extent to which Netflix has set a high bar,” said eMarketer analyst Paul Verna.

Netflix had a negative cash flow of $1.3 billion in fourth quarter, bringing its total for all of 2018 to a negative $3 billion.

The Los Gatos, California, company expects burn through another $3 billion this year as it continues to spend heavily for the rights to popular programming, such as the film “Bird Box,” which the company said has been watched by 80 million households since its Dec. 21 debut on the streaming service.

Netflix also released other insights into how many people are watching its service. That’s a departure for a service that has fiercely guarded the data it regards it as a competitive advantage that helps guide its decision on the types of entertainment likely to resonate with its audience. The change could be an attempt to reassure investors that its free-spending ways are paying off.

The company estimated it accounts for about 10 percent of the time spent watching television in the U.S. Besides “Bird Box,” Netflix also released projected viewership numbers on two other pieces of programming, “You” and “Sex Education,” both of which it expects to be watched by 40 million households during their first month on the service.

Even as its burns through cash, Netflix remains profitable under accounting rules. It earned $133.9 million, or 30 cents per share, for the fourth quarter, a 28 percent decrease from $185.5 million, or 41 cents per share, at the same time in the prior year. The earnings per share exceeded the average estimate of 24 cents among analysts surveyed by Zacks Investment Research.

Revenue for the past quarter climbed 27 percent from the previous year to $4.2 billion, in line with analysts’ estimates.