What Is Netflix’s Q1 Outlook?

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Netflix‘s (NASDAQ: NFLX) Q4 earnings per share beat consensus estimates but revenues fell short of market expectations. The company reported net streaming additions of 8.86 million in the quarter. In Q4, the company’s revenues grew a robust 27% year-over-year (y-o-y) to $4.2 billion, driven by growth in subscribers across both the U.S. and international streaming markets. The international subscriber base continued to increase at a rapid pace (40% y-o-y) once again, while the domestic subscriber base growth stabilized in the low double digits. Further, the streaming giant’s operating margin fell to 5.2% in Q4 from 7.5% from an year ago quarter, as higher marketing costs and more titles being introduced were absorbed. For the full-year 2018, Netflix recorded $7.5 billion in content amortization and expects this amount to grow further. The company also reported negative cash flow of $3 billion for 2018 and expects a similar level in 2019.

Netflix saw its stock gain nearly 20% over the course of 2018. We have a $376 price estimate for Netflix’s stock, which is almost 10% ahead of the current market price. We have created an interactive dashboard on what to expect from Netflix’s Q1, which outlines our forecasts for the company in the next quarter. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. Below we outline the key takeaways from Netflix’s Q4 as well as its outlook going forward.

Streaming Business Continues To Grow 

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Streaming revenues increased 30% y-o-y to $4.1 billion as the company’s subscriber base grew across both U.S. and international streaming services. U.S. Streaming revenues increased by 22% y-o-y to $2 billion. U.S. streaming memberships grew by 11% to 60.5 million (5.8 million addition y-o-y, 2 million sequentially), while the contribution margins for the U.S. Streaming business decreased to 29.6% from 30.9%.

International Streaming revenues grew 36% y-o-y to 2.1 billion. In Q4, total memberships for international streaming services grew to 87.9 million (25 million addition y-o-y, 9.3 million sequentially), while paid subscribers grew to 80.8 million (22.9 million addition y-o-y, 7.3 million sequentially). Additionally, the contribution margins grew to 3.9% from a 2.5%, largely due to the timing of content deals that have been pushed back to later quarters. Overall, Netflix’s paid memberships were 139.2 million at the end of the quarter, while its total memberships grew to 148.4 million.

Q1 Expectations

In Q1, Netflix expects 8.9 million global net additions (1.6 million net adds in the U.S. and 7.3 million internationally), compared to an 8.5 million consensus estimate. The company also expects an operating margin of 8.9% in Q1. Further, the company is also raising its prices in Q1 in the U.S. and some Latin American markets. We forecast Netflix to reach 62 million subscribers in the U.S. with an average monthly fee per subscriber of just over $11, translating into $2.1 billion in domestic streaming revenues for Q1. In addition, we also estimate close to 95 million subscribers in international markets with an average monthly fee per subscriber of $8.28, translating into about $2.4 billion in international streaming revenues in the same period. Netflix has been growing its subscribers by leveraging its original content slate, and we expect this to continue in the near term as well. On the other hand, Netflix’s DVD business is expected to continue to lose steam, and its revenues will likely decline to just below $80 million. Overall, we expect the company to report revenues of around $4.5 billion, based on strong adoption in international markets. Furthermore, we anticipate that the total subscriber base for both international and U.S. streaming services could grow to over 157 million during the quarter.

Netflix’s new pricing in the U.S. will be phased in for existing members over Q1 and Q2, and its U.S. prices for new members are increasing across the board – the Standard plan (two HD streams) is increasing from $10.99 to $12.99 per month; the Premium plan (up to four Ultra HD streams) is increasing from $13.99 to $15.99 per month; and the Basic plan (with a single non-HD stream) is increasing for the first time, from $7.99 to $8.99 per month. This will help boost the company’s average revenue per customer over the coming quarters. 

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