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Netflix Posts Record Subscriber Gain in Q1, Issues Weaker Q2 Growth Forecast

Netflix gained 9.6 million streaming customers in the first quarter of 2019 — ahead of projections and a quarterly record — but a price hike in the U.S. and other countries is slowing its momentum going into Q2.

The company reported paid net adds in Q1 of 9.6 million (with 1.74 million in the U.S. and 7.86 million internationally), up 16% year over year, ending the quarter with 148.9 million streaming customers.

For Q2, Netflix projected total paid net adds of 5.0 million — down 8% year over year — with just 300,000 in the U.S. and 4.7 million for the international segment. The company’s stock fell more than 5% in after-hours trading after the results were released but later rebounded, trading at -1.4% as of 6:30 p.m. ET.

For Q1, Netflix reported $4.52 billion in revenue, up 22% year over year, which was slightly above Wall Street’s consensus estimate of $4.50 billion. It posted earnings of 76 cents per share, well ahead of analyst EPS estimates of 57 cents. Netflix had forecast 1.6 million U.S. paid streaming net adds and 7.3 million internationally for the period.

Netflix is currently rolling out a price hike for all customers in the U.S. and other markets, with its Standard plan (two HD streams) increasing from $10.99 to $12.99 per month. The higher fees are kicking in over the course of Q1 and Q2, according to the company.

The price increases are rolling out in the U.S., Brazil, Mexico and parts of Europe. “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,” Netflix said in its shareholder letter.

With the price hikes, Netflix is forecasting Q2 average revenue per subscriber to increase 2% (versus -2% in Q1) with total revenue increasing 26% in Q2 to $4.93 billion.

Despite the lighter net adds forecast for the second quarter, Netflix said it expects another year of record annual paid net adds in 2019. (It added 29 million worldwide last year.) Netflix is banking on a big slate of originals to attract and retain subscribers through the back half of the year.

“We’re looking forward to a strong slate of global content in the second half of the year, including new seasons of some of our biggest series, ‘Stranger Things’ (July 4th), ’13 Reasons Why,’ ‘Orange Is the New Black,’ ‘The Crown’ and ‘La Casa de Papel’ (aka ‘Money Heist’) as well as big films like Michael Bay’s ‘Six Underground’ and Martin Scorsese’s ‘The Irishman,'” the company said.

Meanwhile, Netflix once again issued some cherry-picked internal stats — attempting to demonstrate the popularity of its original content.

The company claimed it had a “big hit” in “Umbrella Academy,” the series produced by UCP based on the comic book by Gerard Way and Gabriel Bá, which has been watched by 45 million streaming members in its first four weeks of release. Action-heist movie “Triple Frontier,” starring Ben Affleck and directed by J.C. Chandor, has been watched by over 52 million member households in its first four weeks on Netflix, while “The Highwaymen” starring Kevin Costner and Woody Harrelson is on track to being watched by over 40 million member households in its first month.

Other viewing metrics from Netflix: documentary feature “Fyre: The Greatest Party That Never Happened,” has been watched by over 20 million users in its first month. The David Attenborough-narrated “Our Planet,” which premiered April 5, is “tracking to be one of our most successful global documentary series launches yet,” according to Netflix, with over 25 million member households projected to watch in the first month of release.

Note that the data isn’t independently verifiable. Netflix says it records a user “view” of a movie if someone has watched it to at least 70% completion; views of series include anyone who watched even just one episode to 70% completion.

Meanwhile, Netflix said it will begin testing Top 10 lists of the most popular content across multiple categories in the U.K. this quarter. It’s not sure if that will be something it widely adopts: “For those who want to watch what others are watching, this may make choosing titles even easier. After a few months we’ll decide whether to end or expand the test.”

Over the next several months, Netflix plans to start sharing more “granular” data, chief content officer Ted Sarandos said on the company’s Q1 video interview. “We’re trying to get to the place where we could be a lot more transparent both with our producers and with our customers, [who] a lot of times [are] influenced heavily by, ‘What’s the world watching?,” he said.

Disney, Apple and AT&T’s WarnerMedia are planning to launch new subscription VOD services later in 2019. But Netflix said it doesn’t expect new entrants to “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,” according to its letter to shareholders. That’s consistent with its past commentary, as Netflix has argued that it faces thousands of services and apps competing for consumers’ attention. For example, in its January letter to shareholders, Netflix claimed that Epic Games’ “Fortnite” is a bigger competitor than HBO.

That said, Netflix’s stock took a hit after Disney last week revealed that Disney+ — its ad-free subscription service — will launch in the U.S. at $6.99 monthly in November, undercutting the SVOD leader. The Mouse House also set an aggressive subscriber target of 60 million-90 million customers for Disney+ by fiscal year 2024.

Netflix continues to burn cash. Free cash flow for Q1 was -$460 million (compared with -$287 million in the year-ago quarter). The company said it now expects its free cash flow deficit for the full-year 2019 deficit to be “modestly higher” than it previously guided, to -$3.5 billion “due to higher cash taxes related to the change in our corporate structure and additional investments in real estate and other infrastructure.” It had previously told investors it was expecting negative free cash flow of $3.0 billion for 2019; Netflix says it still expects free cash flow to improve starting in 2020.

Also in the shareholder letter, Netflix said that chief content officer Ted Sarandos is leading the search for a new chief marketing officer (who will report to Sarandos) to replace Kelly Bennett, who last month announced his retirement after seven years at the company.

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