After the bell on Tuesday, the streaming giant reported Q1 revenue of $4.52 billion (up 22% annually) and GAAP EPS of $0.76. Revenue slightly beat a $4.5 billion consensus analyst estimate, while EPS, boosted by the push-out of some spending expected in Q1 to later in the year, topped a $0.58 consensus.
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However, as usual, Netflix's subscriber numbers were taking the spotlight. Reed Hastings' company says it added 9.6 million paid streaming subscribers in Q1, topping guidance of 8.9 million and raising its total base to 148.86 million. However, for the seasonally weaker second quarter, Netflix guided for 5 million paid streaming net adds. That's below a consensus of about 5.5 million, though it's worth noting that Netflix has been beating subscriber guidance in recent quarters.
Total streaming net adds, which also account for changes to Netflix's free trial count, totaled 6.96 million. The company usually sees its free trial base jump in Q4 and drop in Q1.
This article has been updated to discuss comments made during Netflix's earnings interview, as well as provide additional details from its Q1 report.
Netflix's shares initially fell as much as 5% in after-hours trading on Tuesday, before eventually paring those losses. On Wednesday morning, shares were down 0.8% to $356.92; Netflix is now up about 33% on the year.
Here are some notable takeaways from Netflix's Q1 results and shareholder letter.
1. International Momentum Remains Pretty Strong
Netflix added 7.84 million international paid streaming subscribers in Q1, topping guidance of 7.3 million and raising its total base to 88.63 million. Q2 guidance is for 4.7 million international paid subscriber adds, slightly below a consensus of 4.77 million but also possibly conservative given Netflix's recent track record.
2. U.S. Subscriber Growth Was Solid in Q1, But a Q2 Slowdown Is Expected
In spite of its recent U.S. price hikes (they went into effect in March), Netflix added 1.74 million paid streaming subs in its home market in Q1, beating guidance of 1.6 million. However, it's only guiding for 300,000 Q2 subscriber adds, below a consensus of 678,000.
Netflix insists the response to its U.S. price hikes is in line with its expectations, although it's seeing "some modest short-term churn effect as members consent to the price change."
3. A Strong Dollar Remains a Major Revenue Headwind for Now
If not for currency swings, Netflix's Q1 revenue would have risen 28% annually rather than 22%. Likewise, the company's subscription average revenue per user (ARPU) was down 2% in dollar terms, but up 3% excluding forex changes.
With recent price hikes in the U.S. and certain foreign locales helping out, Netflix expects its Q2 revenue to be up 26% in dollars and 32% in constant currency. ARPU is expected to be up 2% in dollars and 7% in constant currency.
4. Netflix Lowered Its Free Cash Flow Guidance a Little
After previously forecasting its 2019 free cash flow (FCF) would be similar to a 2018 level of negative $3 billion, Netflix is now guiding for 2019 FCF of about negative $3.5 billion. The company cites higher cash taxes related to a change in its corporate structure that's expected to result in lower tax rates down the line, as well as investments in real estate and other infrastructure.
Netflix, which ended Q1 with $3.3 billion in cash and $10.3 billion in debt, reiterated that it plans to tap debt markets to finance its capital needs, as it continues making giant content investments at home and abroad. The company also reiterated that it expects its FCF to meaningfully improve in 2020, and to keep improving in subsequent years.
Massive content investments remain the main reason Netflix is still cash-flow negative. The company's cash content spend topped $13 billion in 2018, and is expected to be higher this year.
5. Netflix Insists It's Not Worried About Disney and Apple
Less than a week after Disney (DIS - Get Report) shared a launch date and pricing for its anticipated Disney+ service, and less than a month after Apple (AAPL - Get Report) unveiled plans to launch a video service called TV+ this fall, Netflix (echoing past remarks about rival offerings) insists it isn't worried about either entrant.
"We don't anticipate that these new entrants will 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," the company said. "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 [video] viewing."
During the earnings interview, Hastings reiterated Netflix's view that it's not only competing against rival streaming services, but against digital entertainment options in general (TV, DVDs, YouTube, Fortnite, etc.).
And ahead of the year-end expiration of a major content-licensing deal with Disney, chief content officer Ted Sarandos disclosed that original series account for all ten of Netflix's most popular series', as well as 21 of its 25 most popular series'.
6. The Company Is Getting More Comfortable About Sharing Viewing Stats
As was the case in its Q4 shareholder letter, Netflix shared a host of stats about viewing activity for popular originals. Among other things, the company noted that The Highwaymen, an original film about Bonnie and Clyde, is on track to being seen by over 40 million households in its first four weeks; Umbrella Academy, a TV series that's a comic book adaptation, has been seen by 45 million households in its first four weeks; and Our Planet, a nature documentary shot in 50 different countries, is expected to be seen by over 25 million households in its first month.
Interestingly, Netflix also said that it plans to start a U.K. test later in Q2 in which it will show subscribers top-10 lists of its most popular content across various categories. The company will decide "whether to end or expand the test" after a few weeks.
In addition, Ted Sarandos said on the earnings interview that Netflix plans to start sharing more specific and granular viewing data later this year -- first with content producers, and then with customers and the media.
7. Netflix's Content Chief Is Getting New Responsibilities
In March, Netflix disclosed that chief marketing officer (CMO) Kelly Bennett is retiring. The company now says that Sarandos will oversee both marketing and content going forward. As a result, Sarandos will lead Netflix's search for a new CMO.Netflix spent $2.37 billion marketing -- much of it to promote its originals -- in 2018, and $616.6 million on marketing in Q1.
8. Subscription Bundles Still Account for a Small Portion of Netflix's Sign-Ups Netflix says its services are now distributed via bundling deals with 10 carriers globally (T-Mobile US ( TMUS - Get Report) and Comcast ( CMCSA - Get Report) are notable U.S. partners). The company reiterates its view that these deals have been a positive, with economics similar to what Netflix sees from partnerships where its services are offered à la carte.
However, during the earnings interview, product chief Greg Peters said the number of sign-ups these deals produce is "still quite small" relative to organic sign-ups. He called them "a nice supplemental channel" for adding subscribers.
9. Operating Expenses Continue to Grow RapidlyThough content is easily Netflix's biggest expense, the company is also investing heavily in other areas. On a GAAP basis, Netflix saw its marketing spend rise 15% to $616.6 million, its technology and development (R&D) spend rise 32% to $372.8 million and its G&A spend rise 50% to $202 million.
10. Netflix Doesn't Appear to Be Planning Any Major Acquisitions
When asked on the earnings interview about Netflix's thinking about acquiring assets as opposed to building them internally, Hastings suggested his company isn't likely to splurge on major deals.
"I don't think investors have too much to worry about there," he said, while adding Netflix has only done a couple of "micro-acquisitions" over its 20-year history. "No big appetite, no big need...if we can produce the world's best content, if we can deliver it with the world's best user interface, then we can grow for many, many years ahead."
TheStreet's Eric Jhonsa previously covered Netflix's Q1 report and earnings interview through a live blog.