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Netflix Adds Record Number of New Subscribers, Disappoints Markets

29 million new subscribers in 2018...

By CBR Staff Writer

One of the perils of being a publicly listed company: it can be hard to impress the markets. Netflix earnings [pdf] report this evening revealed a record 8.8 million new paying subscribers signed up in Q4, with a striking 7.3 million of them outside the US.

Shares fell on the news.

(It has added 29 million new subscribers in 2018 and now earns 10 percent of US screen time. As Netflix notes: “We earn consumer screen time away from a very broad set of competitors. We compete with (and lose to) Fortnite more than HBO”).

netflix earningsNetflix Earnings: Margins Fall

Q4 operating margin dipped to 5.2 percent on investment in programming, however, but met full year expectations of 10 percent, in line with the company’s targets. Markets were disappointed: eager traders have bet the company’s stock up 50 percent in recent weeks, expecting stellar results. With Q4 revenues of $4.19 billion falling shy of analyst expectations of $4.21 billion, shares dropped back as a result.

Some people are hard to please.

(Saxo Bank is among them: in its “outrageous predictions for 2019” its analysts cheekily predicted a “gutting” of Netflix’s share price this year: “Investors suddenly fret the firm’s fearsome leverage, with a net debt to EBIDTA after CAPEX ratio of 3.4 and over $10 billion in debt on the balance sheet. Netflix’s funding costs double, slamming the brakes on content growth and gutting the share price.”)

See also: Netflix Debt: Company Plans $2 Billion Bond Issuance

“A majority of our revenue is not in dollars, so when there are material FX moves,  investors know to expect material top line changes” the company added in an earnings report. (Curiously for a company of the size, it does not hedge FX.)

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In terms of debt, the company raised £1.5 billion-equivalent alone in debt in Q4 (EUR1.1 billion in bonds with a 4.625% coupon and USD800 million at 6.375%).

“As long as we judge our marginal after tax cost of debt to be lower than our marginal cost of equity, we’ll continue to finance our working capital needs through the high-yield market” the company said.

It finished the year with cash of $3.8 billion.

The company’s annual marketing budget has nearly doubled year-on-year to $2.36 billion, versus $1.43 billion for full-year 2018.

Net income has more than doubled: $1.211 billion for 2018, versus $558 million for 2017.

(That’ll pay for Sex Education for 40 million viewers, and a Bird Box or two).

One thing continues to impress, meanwhile: Netflix’s ability to sustain this level of growth with a smooth technical experience for such a huge and rapidly growing user base. That’s thanks in part to cloud host AWS, but also the company’s own engineers, who’ve developed and open sourced a large array of tools over the years and document their latest escapades at the excellent NetflixTechBlog.



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