MUMBAI: Exceeding user addition forecasts, Netflix’s first quarter (Q1) earnings were in line with expectations while revenue bettered estimates.
Revenue grew by 43 per cent year over year in Q1 due to a 25 per cent increase in average paid streaming memberships and a 14 per cent rise in the average selling price (ASP). Operating margin of 12 per cent rose 232 bps year over year. This was higher than the company’s quarter guidance, due primarily to the timing of content spend.
Global net user adds totalled a new Q1 record of 7.41 million, up 50 per cent year on year and higher than the forecast of 6.35 million.
“The variance relative to our guidance was driven by continued strong acquisition trends across the globe which we attribute to the growing breadth of our content and the worldwide adoption of internet entertainment,” Netflix said in its statement.
In the US, it added 1.96 million memberships (compared with forecast of 1.45 million). Outside of the US, membership grew by 5.46 million (forecast of 4.90 million). Our international segment now accounts for 50 per cent of revenue and 55 per cent of memberships
Netflix has relied on international growth and heavy investments in original content to drive subscriptions — and Monday's results provided an update on their effectiveness.
Netflix's addition of 7.41 million international subscribers set a new record, marking growth of 50 percent from a year ago.
Chief content officer Ted Sarandos said Netflix has shot original content in 17 countries as it focuses more on local programming, and that many of Netflix's foreign-language shows would be considered "big hits" on American cable channels, thanks to artful subtitling. CEO Reed Hastings added that Netflix has also seen success on its international mobile app offerings. But Hastings also said that the company hadn't changed its view on expanding in China, and will continue to license content.
The company also said it expects to have $7.5 billion to $8 billion of content expenses this year, in line with previous estimates. Netflix had said it expects to grow to 60 million to 90 million members in the U.S. over time and that it would spend $8 billion on content and $2 billion on marketing this year.
The company highlighted Spanish-language hit La Casa de Papel, unscripted series Queer Eye and franchises such as Marvel's Jessica Jones, Grace and Frankie, Santa Clarita Diet and A Series of Unfortunate Events. Netflix also credited new talent, such as Shonda Rhimes and Jenji Kohan, for their "proven track record of success" and for allowing Netflix to cut back "reliance on third-party studios."
"We're investing in more marketing of new original titles to create more density of viewing and conversation around each title," the company said.
The marketing spending comes after Netflix was barred from competing at the Cannes film festival due to a rule change — a setback the company called unfortunate.
One thing that's not on the spending slate, Sarandos said, is news programming.
"Our move into news has been misreported over and over again. We're not looking to expand into news beyond the work that we're doing in long-form and short-form documentary," Sarandos said. "Topical interview shows, absolutely, but keep in mind, those are entertainment."
Netflix faces increasing competition from Amazon and Disney, which have their own offerings, as well as traditional media companies and technology companies such as Apple. Hastings said the company still has a long way to go to compete with the likes of YouTube and noted that Netflix's ability to raise prices depends on providing more value than competitors.
At the same time, Netflix is expanding into cable bundles and recently announced a new offering with Comcast, in addition to bundles with Sky, T-Mobile and Altice.
Netflix said on Monday the bundles allow the company to upsell existing subscribers. Executives said on a conference call that the "new wave" of operator partnerships was a consistent shift across all geographic markets.
"We remain primarily a direct-to-consumer business, but we see our bundling initiative as an attractive supplemental channel," the company said.
In February this year, Hastings, at a business summit in India, said that Netflix saw a potential of adding 100 million customers in India. “It definitely helps to have confidence on the growth of the internet. Even we couldn’t predict the last two years of Indian internet growth,” he had said.
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