Netflix Inc. (NFLX) - Get Report shares surged the most in more than two years Wednesday after the streaming media group added 8.5 million new paid subscribers over the fourth quarter, taking its global total past 200 million.
The stronger-than-expected gains, powered by growth in Europe and Asia, offset disappointing fourth quarter earnings of $1.19 per share but were better reflected in a top line revenue total of $6.64 billion. Stronger operating margins of 14.4%, along with a pledge to be cash flow positive by the end of the year, gave investors an even better sense of the group's near-term outlook, which includes paid additions of around 6 million over the first three months of the year and revenues of around $7.1 billion.
The free-cash flow forecast reduces Netflix's reliance on debt financing to pay for new content, allows it to sink a 2021 bond payment due next month, and could open the door to shareholder returns, in the form of buybacks, in the second half of the year.
"We're super proud of where we are from a free cash flow perspective. And we talked a bit internally before the call as to what was a bigger milestone for us to pass the 200-million member mark or kind of turning to this next chapter in terms of our free cash flow and the ability to self-fund our growth going forward," CFO Spence Neumann told investors on a conference call late Tuesday.
"And we think that's a pretty big milestone for us. To the point of our capital allocation approach, the philosophy remains unchanged, which is that we're going to be disciplined stewards of the capital and try to do things that we believe are value maximizing for our shareholders," he added. "But we have turned this corner where now we can, as we talked about with $8 billion of cash on the balance sheet, projecting to be cash flow about breakeven in 2021 and then positive thereafter. We want to return excess cash to our shareholders."
Netflix shares were marked 14% higher in early trading Wednesday to change hands at $572.00 each, a move that would push the stock into positive territory for the past six month period.
"Netflix's 4Q earnings letter marked several encouraging shifts," said KeyBanc Capital Markets analyst Justin Patterson. "International is increasingly driving the business (both from paid net adds and from non-English originals like Lupin gaining larger audiences) and the free cash flow (FCF) profile has materially improved, which positions Netflix to become less reliant on debt financing."
"While 2021 paid net adds remains a key question for the call given challenging year-on-year comps, this quarter's results should refute many bear concerns," he added.