Analysts probe Netflix

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A slew of post-results analysis on Netflix’s latest numbers offers considerable guidance for the rest of 2019, and perhaps beyond for the SVoD giant. While the rise in subscription rates for US viewers generated plenty of headlines, the progress internationally was praised. But that doesn’t tell the whole story.

For example, international revenues – on an ARPU basis – were under pressure. The actual revenue per user fell to $9.10 in Q4 from $9.27 in Q3/2018. However, the answer is in the exchange rates  (“headwinds”) which some analysts suggested that an international rise in monthly fee was quite probable. On the total International revenue picture Netflix said ‘headwinds’ meant a negative -$183 million, and that for Q1/2019 this will grow to around $200 million.

Analysts at MoffettNathanson (MN) summed it up saying: “These headwinds from currency impact profitability as there is a mismatch between international revenues collected in local currencies and expenses paid in US dollars. Putting that aside, we find it interesting that the Q1 2019 international RPU guide is around $10.09, when adjusted for F/X, which represents around +3 per cent core growth. Netflix will likely raise prices in more international markets over the year helping to offset any mix shift issues from moving into lower RPU markets.”

Of course, the Netflix team do not want to kill the golden goose, and International is where the exceptional growth is occurring. MN suggests a glorious 2019 for Netflix, internationally as well as in the US domestic market. “On the positive side, we are impressed by the sheer size of Netflix’s Q1 international net paid subscriber additions guide of 7.3 million, which is 1.3 million more than Q1 2018. If we assume normal seasonality, Netflix will likely add over 27 million paid net international subscribers this year, an unfathomable number and speaks to the early mover strength of their efforts. By year end 2019,

Netflix should have over 100 million paying subscribers outside the US and 63 million domestically. By 2020, international is expected to be double the size of their US subscriber base, which is something that we never would have never assumed. Operating margins should improve to over 15 percent by Q3 as pricing ramps over the year.”

Nevertheless, the consensus is that Netflix will still report negative cashflow through 2019.

The strategy for International is to invest heavily in local content, and sums of up to $15 billion are spoken about for 2019. Reed Hastings admitted during his conference call with analysts that “the more investment you’re putting in, the more people are finding content they love.”

Analysts at Exane/BNPP concurred, saying that growth for Netflix is far from over and this – potentially – is a negative for its European broadcasters and OTT competitors (or would-be competitors) and that Netflix remains a major problem for European broadcasters. “Netflix growth is led by significant content investments (cash programming costs are expected to grow from cUS$13bn in ’18) which both comes at the expense of most broadcasters but also provide revenue opportunity for the best placed in terms of content production. As new entrants (Disney, Comcast, ATT, Apple) help expand the OTT market competition for TV screen time is set to intensify. Despite ongoing initiative (Salto in France, BBC and European PSBs), European broadcasters overall lack scale to pose challenge. With Netflix increasing local content investments (particularly in the UK, Germany and Spain in Q4 18), European broadcasters are likely to see increased competition. Note however that Netflix has announced it is to increase the number of co-produced titles from 140 in 2018 to 180 in 2019. This is a positive for content producers in particular ITV Studios, Lagardere Studios, RTL Freemantle and others.”

One glimmer of hope for satellite players in the US and their cable distribution partners is that satellites serve 100 million US cable homes. “At the current pace of net US subs adds it would take Netflix another 5 years to reach a 90 per cent cable household penetration level,” says Exane/BNPP.


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