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Netflix Turns in Record Q4 Subscriber Gain, Price Increase Weighs on U.S. Forecast

Netflix is beating Wall Street expectations for international subscriber growth — but its recently announced price increase in the U.S. may have put a damper on its momentum in the States.

For the fourth quarter of 2018, Netflix reported 1.53 million paid net adds in the U.S. and 7.31 million internationally, to end the year with 139 million streaming members worldwide. The 8.8 million overall net gain was the biggest Q4 in the company’s history. Netflix had forecast Q4 U.S. net additions of 1.5 million paid streaming subscribers and 6.1 million international paid subs, with analyst expectations roughly in line.

For the current quarter, Netflix forecast 1.6 million paid net adds in the U.S. and 7.3 million internationally. That’s lower in the United States and higher abroad than expected: Analysts were previously modeling Q1 2019 U.S. net paid subscriber additions at about 2 million and 6.7 million overseas. The price hikes on all U.S. plans are expected to lead to higher cancellation rates as they ripple through mid-2019, while at the same time boosting average revenue per customer.

The company beat Wall Street estimates on earnings per share but fell a bit short on the top line. Netflix reported $4.187 billion in revenue for Q4 and earnings per share of 30 cents. Wall Street analyst consensus estimates had pegged sales of $4.21 billion and EPS of 24 cents for the period.

Netflix’s stock fell as much as 4.3% in after-hours trading on the earnings report, as investors may have been hoping for a bigger boom in U.S. subscriber and revenue growth. The company forecast Q1 financial results below Wall Street expectations, guiding for $4.49 billion in revenue (vs. $4.61 billion consensus estimate) and net income of $253 million (vs. $371 million analyst estimate).

The company’s earnings report comes three days after Netflix raised prices of streaming plans in the U.S. and some Latin American markets — prompting the stock to jump 6.5% Tuesday, as investors enthused over the signal of Netflix’s confidence in its subscriber momentum and massive content spending.

In the U.S., 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. Netflix said the price increases for the U.S. would roll out for existing customers over Q1 and Q2.

Netflix also divulged viewership data and estimates for several original series and movies in announcing Q4 results, trying to demonstrate that it’s succeeding with its cash-intensive programming strategy.

According to the company’s internal metrics — which aren’t independently verifiable — “Bird Box” is on track to be viewed by 80 million subscribers in the first four weeks after its Dec. 21 release (among those who watched to at least 70% completion). It said drama “You,” picked up after its debut on Lifetime, and “Sex Education,” a dramedy out of the U.K. starring Gillian Anderson, are expected to have 40 million viewers in their first four weeks on Netflix (although its tabulations for series include anyone who watched even just one episode to 70% completion).

Netflix did not provide guidance on content spending for 2019. VP of investor relations Spencer Wang noted on the company’s video interview that Netflix recorded $7.5 billion in content amortization in 2018 and that’s expected to grow this year. Netflix reported negative cash flow of -$3 billion for 2018 and expects a similar level in 2019.

Chief content officer Ted Sarandos, also on the investor interview, claimed that the “vast majority” of content viewing on Netflix comes from originals, but he didn’t provide specific data. He also said Netflix will enter into more coproductions around the world this year: In 2018, it had 140 “original” shows that premiered on a TV network somewhere in the world before streaming worldwide on Netflix; Sarandos said there are set to be 180 this year.

Starting with the Q4 2018 results, Netflix is providing guidance only for paid streaming memberships (excluding free-trial accounts), which the company says will give investors a more accurate forecast compared with projections for total streaming users. Netflix made the reporting change after it significantly over-forecast global net additions for the second quarter of 2018, sending the stock tumbling. CEO Reed Hastings told investors the miss was due to “lumpiness in the business.”

Among the slew of originals Netflix has recently released and ordered, the streamer announced the second-season renewal of comedy series “The Kominsky Method” starring Michael Douglas and Alan Arkin, which picked up two Golden Globe Awards wins.

Meanwhile, Netflix has a new CFO: Earlier this month it named Spencer “Spence” Neumann, poached from Activision Blizzard, as its new chief financial officer, who replaces outgoing finance chief David Wells.

Netflix reported operating margin of 10.2% for full-year 2018 (versus 7% in 2017). It’s aiming for 13% in 2018 — unchanged from previous guidance, which surprised some analysts given the revenue upside predicted from the U.S. fee increase. Netflix clarified that its prior margin guidance for ’19 factored in planned subscription-fee hikes.

“We are in no rush to push margins up too quickly, as we want to ensure we are investing aggressively enough to continue to lead internet TV around the world,” the company explains on its investor-relations site.

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