Netflix Posts Record Quarterly Sub Growth; Lower Q2 Growth Projection

Netflix hit another home run in subscriber growth, adding record 9.6 million net additions in the first quarter, ended March 31 — up more than 16% from 8.26 million net additions in the previous-year period.

Netflix ended the period with 148.86 million paid subs, up 25.2% from 118.9 million subs in the previous-year period.

The subscription streaming video pioneer April 16 said it added 1.74 million domestic subs to 60.2 million, in addition to 7.86 million subs internationally to 88.6 million. The service had forecast subscriber growth of 1.6 million domestic and 7.3 million foreign.

Wedbush Securities media analyst (and Netflix bear) Michael Pachter had projected 1.5 million domestic subs; 7.3 million internationally.

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Netflix posted net income of $344 million on revenue of $4.5 billion. That compared to net income of $290 million and revenue of $3.7 billion during the previous-year period.

Notably, Netflix alluded to its recent price hikes in the U.S., Brazil, Mexico and parts of Europe having some effect in the current quarter. Indeed, the streamer is projecting 5 million new subs in the current second quarter (ending June 30) — about 1 million below Wall Street projections.

“The response in the U.S. so far is as we expected and is tracking similarly to what we saw in Canada following our Q4’18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change,” CEO Reed Hastings and CFO Spence Neumann wrote in the shareholder letter.

The executives hailed recent OTT video announcements by Apple and Disney as “world class consumer brands,” adding that Netflix would be  “excited to compete.”

Hastings and Neumann said they don’t expect Apple TV+ and Disney+ to materially affect its growth because the ongoing transition from linear to on-demand video is “so massive” ​and because of the differing nature of Netflix’s content offerings​.

“We believe we’ll all continue to grow as we each invest more in content and improve our service and as consumers continue to migrate away from linear viewing [similar to how U.S. cable networks collectively grew for years as viewing shifted from broadcast networks during the 1980s and 1990s],” Hastings and Neumann wrote.

Netflix’s legacy by-mail disc rental service continues to generate significant  operating income. The oft-neglected (by management) business contributed $46.7 million in operating income on revenue of $80.6 million. That compared to operating income of $56.8 million and revenue of $98.7 million last year.

The service ended the period with more than 2.5 million disc subscribers, down from 3.1 million subs last year.

Netflix said new-release movie, Triple Frontier, ​starring Ben Affleck, has been watched by more than 52 million member households in its first four weeks on Netflix.

Ben Affleck in Netflix original movie, ‘Triple Frontier.’
Woody Harrelson and Kevin Costner in ‘The Highwaymen’.

The streamer said new-release movie, ​The Highwaymen, starring Kevin Costner and Woody Harrelson as two lawmen attempting to bring Bonnie and Clyde to justice, is on track to being watched by more than 40 million subscriber households in its first month.

Separately, Netflix said original documentary, FYRE: The Greatest Party That Never Happened​, has been watched by more than 20 million member households in its first month on Netflix.

Doc Our Planet​, filmed over four years in 50 countries, is tracking to be one of Netflix’s most successful global documentary series, with more than 25 million subscriber households projected to watch in the first month of release.

 

Disney+ Day After: Stock Up, Netflix Down

The morning after Disney’s unveiling of branded subscription streaming video platform, Disney + launching on Nov. 12, Wall Street applauded the move, upping Disney shares nearly 10% to $128 per share in mid-morning trading.

Netflix, which is Disney’s targeted competitor despite myriad denials, is down slightly (2.79%) at $357.37 per share.

Goldman Sachs welcomed the service’s wide content selection, pricing (23% lower than Netflix), global rollout and aggressive subscriber projections.

Credit Suisse cautioned about Disney’s projected losses (approaching $1 billion) in the upstart direct-to-consumer & international business segment, which includes ESPN+ and Hulu. Disney expects Disney+ to be profitable in five years.

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SunTrust, citing an internal survey, found that just 8% of Netflix subs said they expected to switch to Disney+, with 59% sticking with Netflix. Another 24% said they would subscribe to both.

“Bottom-line, Disney+ features family content, while Netflix offers a much broader range of content with the majority of the most-searched content on the platform,” SunTrust analysts wrote in an April 12 note as reported by CNBC. “As such, we do not view Disney+ as a strong alternative to Netflix.”

Rich Greenfield, media analyst at BTIG Research in New York and former Netflix earnings webcast moderator, wondered if original Disney+ series will be available to binge view or just on a weekly basis similar to HBO and Showtime.

“No clarity on release schedule for show yet,” Greenfield tweeted. “Sounds like no binging.”

Notably, while the last original new-release Disney movies coming to Netflix this year include Solo: A Star Wars Story, Incredibles 2, Ant-Man and the Wasp, Christopher Robin, May Poppins Returns, Ralph Breaks the Internet, and The Nutcracker and the Four Realms, among others, little attention has been made that catalog Disney movies will reportedly still be heading to Netflix on a per-title basis.

The “pay 2” window essentially follows the free cable window when movies are released on networks such as USA Network and FX, among others.

“Wonder if Disney will explain how Disney+ will lose access to certain Pixar, Marvel, Disney and Star Wars films as they enter the “pay 2” window and revert to Netflix,” Greenfield tweeted.

Separately, Michael Pachter, media analyst with Wedbush Securities in Los Angeles, suggested Netflix sub growth could be negatively affected in Q2 following the the service’s recent price hikes.

“Although domestic Q1 [ended March 31] subscriber additions will likely be in line with guidance, the price increases in April – June may limit growth (and guidance) to below 1 million net additions, which may weigh on the stock,” Pachter wrote in an April 11 note.

Netflix releases Q1 fiscal results on April 16.

 

 

 

 

Can Netflix Ever Win a Best Picture Oscar?

NEWS ANALYSIS — Netflix original movie Roma won three Oscars, including Best Foreign-Language Film, Best Director and Best Cinematography. But the black-and-white Mexican drama with 10 Oscar nominations had been a heavy favorite for Best Picture, which instead went to Green Book.

Did Netflix’s controversial strategy offering original movies on its service globally concurrent with any theatrical release turn off traditional voters?

Netflix reportedly spent $30 million marketing the $15 million movie during the just-concluded industry awards season. The goal clearly was a Best Picture Oscar.

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The SVOD pioneer, which has an office in Beverly Hills, in addition to a production studio, had canvassed Greater L.A. with billboards and related signage where most of the 7,000 members of The Academy of Motion Picture Arts and Sciences reside.

While Roma’s qualifications for Best Picture aren’t in question (the film was nominated for the category, after all), industry politics undoubtedly played a role in the final outcome — as they do for any nominee.

Director Steven Spielberg, speaking at Cinema Audio Society prior to the Oscars, lamented rewarding a film with scant theatrical release.

“I hope all of us really continue to believe that the greatest contributions we can make as filmmakers is to give audiences the motion picture theatrical experience. I’m a firm believer that movie theatres need to be around forever,” Spielberg said, as reported by The Telegraph.

Indeed, Netflix made sure to highlight the film’s theatrical release in its recent shareholder letter.

Roma is still being exhibited in theaters and has played on over 900 unique screens around the world, including some special 70mm format presentations,” CEO Reed Hastings wrote. “People love films … at home ​and in theaters.”

Michael Pachter, media analyst at Wedbush Securities in Los Angeles, downplayed politics, saying Roma’s best foreign language film win underscored the Academy’s reluctance awarding Best Picture status upon a non-English film.

“I suppose [2011 Best Picture] The Artist was technically a foreign film,” he said. “They just need a movie that is worthy of the award. Netflix will pay up for something like the next CrashArgo or 12 Years a Slave and will win one eventually.”

NATO: Streaming Video Not Stealing Moviegoers

Theatrical owners, especially trade group National Association of Theatre Owners, have long criticized efforts by over-the-top video services (i.e. Netflix) to shorten the theatrical window.

Their argument underscored the contention that streaming video competes against theatrical distribution and negatively impacts consumers frequenting movie theaters.

So, it was a little unusual when NATO released data from a proprietary survey conducted by consultant Ernest & Young suggesting video streamers are more likely to be avid moviegoers than non-streamers.

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Citing a survey of 2,500 respondents, 80% of whom said they saw at least one theatrical movie and streamed video in the last 12 months, average streaming hours per week was higher among frequent moviegoers than respondents who visited a theater only once or twice.

Respondents who visited a theater infrequently reported an average of seven hours of streaming video per week versus 11 hours of streaming per week for those who visited a theater frequently.

The study found that nearly half (49%) of respondents who didn’t frequent a theater in the past 12 months, didn’t stream video content at all. Another 18% streamed online content for eight or more hours per week.

“The results of this study dispel the common myth that millennials are going to the theater less as they stream more content,” Wedbush Securities media analyst Michael Pachter wrote in a Feb. 11 note. “Actually, quite the opposite appears to be true. There is a positive relationship between theater attendance and streaming volume.”

Analyst: Major Studios Could Squeeze Netflix on Original Programming

As Netflix continues its global domination in subscription streaming video, the market leader is facing a looming threat to its vaunted original content pipeline from major studios such as NBC Universal, Warner Bros., Disney and Fox.

With WarnerMedia and Disney launching branded over-the-top video platforms later this year, and Comcast rolling out ad-supported VOD service to its subscribers in 2020, the studios at the same time remain creators of original content for Netflix.

Specifically, the four studios provide about 20% of Netflix’s overall content measured by available hours and nearly 40% of hours viewed on the service, according to Wedbush Securities digital media analyst Michael Pachter.

The analyst, citing a study published by Recode, said that 13 of the 20 most-viewed programs on Netflix were provided by the aforementioned studios, including the top six.

“By the end of 2020, we expect all of this programming to disappear from Netflix, and we think that the company will find replacing the content with originals a daunting task,” Pachter wrote in a Jan. 28 note.

The analyst said Netflix faces replacing existing content from the studios and competing against Amazon Prime Video, Hulu and potentially four competing new streaming services for original fare.

“The balancing act Netflix faces is potentially enormous,” wrote Pachter, a long-time Netflix bear.

He said Netflix continues to juggle licensed originals such as “Ozark” and “House of Cards,” which are owned by Media Rights Capital, and Lionsgate-produced “Orange is the New Black,” with proprietary original fare “Stranger Things,” among others.

Licensed content is subjected to recurring fees. The streaming service can offset the loss of Disney, Fox, Warner and NBC Universal content by licensing equal amounts of content from other sources or by creating its own – a strategy Netflix is pursuing with the hires of former ABC Entertainment President Channing Dungey; Ryan Murphy, producer of “American Horror Story,” Shonda Rhimes, creator of “Grey’s Anatomy” and “Scandal,” and Kenya Barris, creator of “Black-ish.”

Pachter contends the original content will be the subject of a bidding war with Prime Video, Hulu, HBO Now, WarnerMedia and Disney+, among others.

“We think that with lower access to high quality content, Netflix may actually end up spending less than it has historically, although the company must replace existing third party content with its own and may redouble its owned original efforts,” wrote the analyst.

 

Netflix Overcomes Brazil Hurdle

In 2011 Netflix launched service in 43 Latin America countries, beginning with Brazil. Expansion into Brazil — the fifth-largest media market in the world, after China, India, the U.S. and Indonesia, was fraught with challenges.

Consumers were less familiar with using credit cards to pay for recurring charges such as over-the-top video. In addition to spotty broadband penetration, the lack of localized content (at the time) on Netflix alienated potential subscribers.

“Brazilians enjoy different things, like UFC and stand-up comedies, while hating telenovelas that are made in other Latin American countries,” former chief communications officer Jonathan Friedland told the Brazilian press.

Long-time Netflix bear Michael Pachter, digital media analyst with Wedbush Securities in Los Angeles, went so far as to predict Netflix wouldn’t make it in Latin America.

“This just won’t work in Ecuador or Costa Rica or even Mexico as it has in the U.S.,” Pachter told the Associated Press. “It’s going to depend on how many households have broadband access and what the quality of the content will be like.”

Fast-forward to the present and Netflix is a shining star in Brazil.

Along with Google’s YouTube, Netflix is the first OTT video choice across all devices, according to new data from IHS Markit. About 28% of respondents claim they turn to Netflix first when looking for something to watch, followed by YouTube at 24%. More than 63% of Internet users in Brazil, between the ages of 18 and 64, had access to Netflix, of which 86% claimed to use the service at least once a week.

IHS says that along with growth in OTT video, the installed base of Internet-connected devices grew by 10%, rising to more than 310 million devices in 2018.

More than 40% of survey respondents said they have a personal computer connected to their primary TV screens, while 35% claim to mostly use their smart TV apps to access video content on their primary TVs.

IHS contends that with on-demand video becoming ubiquitous around the world, and Brazil is no exception.

“The country has been experiencing a significant economic slump in recent years and, like other Latin American markets, Brazil’s legitimate pay TV and OTT subscription video-on-demand (SVOD) service providers have seen subscriptions fall or suffer reduced growth,” Erik Brannon, associate director of research and analysis, wrote in a note.“Laptops, tablets, streaming sticks and other devices increasingly pose a threat to cable TV and other traditional TV services.”

In terms of perceived quality, Netflix and YouTube were significantly ahead of pay-TV providers in the following categories: ease of use, flexibility (i.e., “ability to watch what I want when I want”), largest catalog of content, quality of content, and value for the money.

Although this finding is a victory for OTT providers, Netflix and other OTT video services must focus on local language content to remain relevant in the long term, according to Brannon.

Despite the vast library of foreign content Netflix has to draw upon, the amount of Brazilian and Portuguese content remains minimal, which is why the company is now partnering with local producers to boost local content in its library.

As the Brazilian economy continues to improve, growth in pay-TV households is expected to resume. At the same time, a surge in growth is expected in the OTT market as well.

IHS found that pay-TV monthly average revenue per user (ARPU) can cost five times or more than the monthly ARPU of Netflix. Subscription sharing also seems to be a profound problem in Brazil, since nearly 63% of survey respondents reported having access to Netflix, while Netflix subscriptions penetrated less than 25% of all broadband households.

“Connected consumers in Brazil are interested in viewing content in non-traditional ways, which will put added pressure on traditional content and distribution systems when the economy recovers,” wrote Brannon.

 

 

Analyst: Netflix Price Hike to Negatively Affect Sub Growth

Following Netflix’s announcement that it was raising subscription prices, the company’s stock increased in value as Wall Street applauded the service’s first price hike since 2017.

Wedbush Securities’ digital media analyst Michael Pachter has a different perspective. The long-time Netflix bear contends the price hike will negatively impact the SVOD pioneer’s mature domestic subscriber base of around 60 million.

Pachter argues that Netflix has saturated households above the medium income. Any new subs will come from households below the medium income – and likely more price sensitive.

“The latest price increase may slow domestic subscriber growth dramatically this year,” Pachter wrote in a Jan. 16 note. “We do not expect significant churn given the utility provided by the service to existing subscribers but attracting new subscribers will likely be more challenging because of the higher prices.”

The analyst says the price hike will have the biggest impact on Netflix’s $12.99 standard plan affording subscribers to two HD video streams. By comparison, Amazon Prime Video costs $10 monthly when paid annually; and Hulu costs $11.99 for ad-free service.

Regardless, Wedbush contends the additional monthly revenue will never see the bottom line.

“We do not expect a meaningful impact on profitability from the pricing increases, with the extra cash likely used to fund Netflix’s ballooning content budget,” wrote Pachter.

Netflix reports Q4 results at the close of the market on Jan. 17.

 

 

Analyst: ‘Bird Box’ Viewership Suggests Strong Q4 Netflix Sub Growth

Netflix’s fiscal fortunes on Wall Street largely revolve around meeting or exceeding subscriber growth projections. The more subs added, the less attention investors put on the streaming video pioneer’s ballooning content spend.

Netflix is estimating it added 9.4 million new subscribers worldwide in the fourth quarter (ended Dec. 31, 2018), including 1.5 million in the United States.

Wedbush Securities analyst Michael Pachter contends Netflix will meet or exceed those numbers (perhaps gaining 1.7 million domestic sub additions) due to the global streaming success of original movie Bird Box, starring Sandra Bullock.

The post-apocalyptic thriller was streamed by 45 million households during its first week of release last month, according to Netflix. Nielsen said 26 million households streamed the movie in the United States.

Pachter, in a Jan. 14 note, said the sub data meant that about 40% of domestic subscribers and 20% of international subs streamed the movie, suggesting that a larger than normal number of subscribers were active at quarter end.

“We think that the unusually high activity depressed churn [subs not renewing membership], leading to upside to both domestic and international subscriber additions, and we think that our above consensus Q4 subscriber estimates may prove to be conservative,” Pachter wrote. “We expect Netflix to highlight the success of Bird Box as a subscriber driver on its [fiscal] call.”

At the same time, Pachter believes Bird Box was an anomaly. He said comparing the 45 million viewers to the opening weekend of a major theatrical release is misleading. He said that the nature of Netflix’s business model puts no additional cost on subscribers consuming content – making it far more analogous to the consumption of television programming, which also is subsumed by a subscription.

“While Bird Box definitely demonstrates the power of the Netflix platform to drive viewership of its originals, it will not necessarily lead to the long-term retention of subscribers,” wrote Pachter.

Netflix reports Q4 results at the market close on Jan. 17.

 

GameStop Eyes Going Private to Survive

GameStop, the world’s largest video game retailer, is considering strategic options in 2019 that include taking the retailer private as increasing numbers of gamers stream games from the Internet instead of buying discs.

Operating nearly 6,000 stores worldwide, GameStop has more than $800 million in bond debt – 50% of which reportedly is due this year. Revenue remained relatively flat at $5.6 billion during its most recent fiscal period (ended Nov. 3, 2018).

The company generated a net loss of $485 million compared to income of $140 million during the previous-year period. GameStop is currently headed on an interim basis by CFO Rob Lloyd.

Essentially, the retailer mirrors Redbox in 2016, when the kiosk vendor of movie DVD rentals, was acquired and taken private by investor group Apollo Global Management $1.6 billion.

Now, Apollo, and separately Sycamore Partners, is reportedly considering acquiring GameStop in a transaction that could come together in mid-February reports The Wall Street Journal, citing sources familiar with the situation.

It’s an endgame that involves closing unprofitable stores, reducing debit, according to Michael Pachter, media analyst with Wedbush Securities in Los Angeles.

“They’ve lost the interest of investors and being public causes them to do things they might not otherwise do, like try to diversify,” Pachter told the Journal.

Indeed, GameStop continues to invest heavily in the collectibles market, which include posters, T-shirts, action figures, trading cards, and costumes, among others. Collectibles sales increased 11.7% to $154.6 million.

Technology Brands, which includes the Simply Mac retail chain, generated operating earnings of $23.3 million compared to $18 million in the prior-year quarter, despite an 11.9% decline in sales to $171.1 million, primarily due to store closures.

GameStop in late November announced it was selling the Spring Mobile division for $700 million.

Regardless, some analysts expect winter holiday same-store comp sales to decline when Game Stop reports them later this month.

“GameStop has become irrelevant in the video game market,” Mike Hickey, analyst at The Benchmark Co., wrote in a note.

 

 

Netflix in Content Crosshairs

Lost in Netflix’s strong third-quarter subscriber growth numbers was the streaming media giant’s surprise revelation about the ownership status of its original content.

With Netflix spending upwards of $12 billion on original content in 2018 – underscored by $18 billion in third-party content obligations – the service said its alarming negative free cash flow is about to level off.

To assuage naysayers, Netflix (on page three of the shareholder newsletter), disclosed the ownership status of original programing – a dynamic that will continue to change as the Walt Disney Co. pulls original movies and related content from Netflix for its own pending over-the-top video platform.

Netflix says it has three major categories of content: licensed non-first-window content, such as “​Shameless​”; licensed original first-window content, such as ​“Orange Is the New Black”(​owned and developed by Lionsgate), “Ozark” (Sony Pictures Television) and “Insatiable” (CBS); and owned original first-window content from its own studio, such as ​“Stranger Things​.”

The latter category also includes “Big Mouth,” “The Ranch​,” “​Bright​,” “Godless,”​“The Kissing Booth​,” ​“3%,”​“​Dark,”​“​Sacred Games”​and “Nailed It​.”

Within those categories there are lots of subdivisions and per-territory treatments, but those are Netflix big three content buckets.

Netflix claims the classification of content will help reduce its reliance on outside studios, provide greater control over content it creates in-house (i.e., long-term global rights), increase brand/consumer product tie-ins, and lower costs (avoiding third-party studio mark-ups).

“To do this, we’ve had to develop new capabilities to manage the entire production process from creative support, production planning, crew and vendor management to visual effects, to name a few,” Netflix management wrote in the letter.

At the same time, Netflix is staking its future largely on proprietary content, whose popularity is at the whim of an increasingly fickle consumer.

Indeed, with the exception of Emmy-nominated “Stranger Things” and “Godless,” most of Netflix’s award-nominated original content is third-party sourced. The rest is a “hot mess,” according to Wedbush Securities media analyst Michael Pachter.

“We think it is downright quixotic of the company to presume that it can produce compelling content that will replace the licensed content it currently displays from major studios,” Pachter wrote in a note.

Pachter believes that should Netflix somehow default on its mushrooming debt, creditors would be hard pressed to convert any of the content into cash, particularly any of the capitalized content that is owned by others.

“It is simply impossible to comprehend how Netflix has been able to capitalize over $18 billion of its content spending with so few compelling owned original television series and films,” he wrote.