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Netflix Gains Following Mixed Subscriber Numbers: 8 Key Takeaways

The streaming giant topped Q4 paid subscriber add estimates on the back of strong international growth. But it also issued light Q1 subscriber guidance.
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For now, Netflix  (NFLX)  is moving higher after releasing a pretty mixed set of subscriber numbers.

On Tuesday afternoon, the streaming giant reported Q4 revenue of $5.47 billion (up 31% annually) and GAAP EPS of $1.30. Revenue slightly topped a $5.45 billion consensus, while EPS, which benefited from a tax adjustment, easily beat a $0.52 consensus.

This article has been updated to include additional details from Netflix's Q4 report, as well as some comments from its earnings interview.

Paid streaming subscribers grew by 8.76 million sequentially to 167.1 million, beating Netflix’s guidance for 7.6 million paid net adds. However, the company also guided for 7 million Q1 paid net adds, missing a consensus of 8.88 million.

As of the time of this article, Netflix’s stock, which had rallied strongly in recent months following a summer swoon, is up 2.2% after hours to $345.50. Here are some notable takeaways from Netflix’s Q4 shareholder letter.

1. International Subscriber Growth Was Quite Strong

Netflix added 4.42 million paid streaming subs in EMEA in Q4, raising its paid subscriber count for the region to 51.78 million. The Latin American paid subscriber base grew by 2.04 million to 31.42 million, and the Asia-Pac paid base grew by 1.75 million to 16.23 million.

64% of Netflix’s paid streaming subscriber base now resides outside of the U.S..

2 .U.S. Subscriber Growth Fell Short of Guidance

Netflix’s paid streaming subscribers grew by a relatively modest 550,000 in the U.S. and Canada to 67.66 million. In the U.S. in particular, Netflix saw 420,000 paid net adds, missing guidance of 600,000 (going forward, Netflix is only providing global paid net add guidance).

Netflix said its subdued Q4 North American subscriber growth, which came amid the launch of Disney’s  (DIS)  Disney+ service and Apple’s  (AAPL)  TV+ service, was “probably due to our recent price changes and to U.S. competitive launches.”

At the same time -- ahead of Disney+’s expansion into several major European markets on March 31st -- Netflix says it has seen a “more muted impact” from new competition in countries such as Canada, The Netherlands and Australia (all three are markets where Disney+ has launched).

3. The Light Q1 Subscriber Guidance Is Blamed on Multiple Factors

Netflix says its Q1 paid net add guidance “reflects the continued, slightly elevated churn levels we are seeing in the U.S. plus an expectation for more balanced paid net adds across Q1 and Q2 this year.”

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Amid a strong Q2 content slate, seasonal trends are expected to more closely resemble those of 2018 than those of 2019, which saw strong Q1 subscriber growth followed by subdued Q2 growth in the wake of price hikes. As a result, there's a strong possibility that Netflix's Q2 paid net adds could top a pre-earnings consensus of roughly 4 million.

4. Cash Burn Is Expected to Moderate a Bit in 2020

Netflix’s 2019 free cash flow (FCF) came in at negative $3.3 billion, slightly better than prior guidance of negative $3.5 billion. For 2020, Netflix is guiding for FCF of negative $2.5 billion.

The outlook fits with Netflix’s prior comments about FCF improving in 2020, as well as in subsequent years.

5. ARPU Growth Was Steady

As was the case in Q3, Netflix’s global streaming average revenue per user (ARPU) rose 9% annually in dollars and 12% in constant currency (CC).

Thanks partly to 2019’s price hikes, ARPU grew 17% in North America. In EMEA, its grew 3% in dollars and 7% in CC, and in Latin America, it grew 9% in dollars and 18% in CC. In Asia-Pac, where the launch of cheap mobile-only plans is an ARPU headwind, ARPU fell 1% in dollars and was flat in CC.

6. Netflix Is Changing How It Reports Viewership for Originals

Whereas Netflix previously declared that a household had seen an original if it watched at least 70% of a movie of a TV show episode, it now says only two minutes of viewing are needed. The company insists its old approach “makes less sense” at a time when its titles have “widely varying lengths,” while adding that the new approach boosts viewership counts by about 35% on average.

Based on its new methodology, Netflix says that 76 million member households watched "The Witcher" during its first four weeks of availability. 83 million watched Michael Bay movie "6 Underground" during its first four weeks, and 73 million have watched "The Crown" since the show first premiered.

7. Content Spend Will Grow Again in 2020

During the earnings interview, CFO Spence Neumann indicated that Netflix's content amortization expenses, which grew roughly 20% in 2019 to $9.2 billion, will grow at a similar clip in 2020.

He added that the ratio between Netflix's cash content spend, which totaled $14.6 billion in 2019, and its content amortization expenses will drop a bit in 2020. However, that still leaves plenty of room for cash content spend to grow on an absolute basis.

8. Netflix Will Test Mobile-Only Plans in Additional Markets

Netflix asserts that its mobile-only plans, which have launched thus far in India, Indonesia and Malaysia, are revenue-positive and boosting both subscriber growth and retention. 

"We plan to continue to test adding this plan, as well as additional ideas in other countries around the world," the company says.

TheStreet’s Eric Jhonsa also covered Netflix’s Q4 report and earnings interview through a live blog.