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Netflix execs: Price increase to fund growing global content, margin expansion

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Netflix execs: Price increase to fund growing global content, margin expansion

Netflix Inc. will reinvest its profits from a recently announced price increase into its content, with a focus on expanding its local-language and international originals as it continues to tap debt markets to fund expenses, executives said on a Jan. 17 earnings conference webcast.

The company's new CFO Spencer Neumann said he plans to "meaningfully improve" Netflix's negative cash flow, supported by a growing operating margin. The company guided for a margin expansion of 13% for the year, driven in part by the U.S. streaming price increase and offsetting a portion of the company's expenses. Netflix aspires to self-funding, but in the interim Neumann said it will continue to tap debt markets to pay for its content and expansion.

Netflix grew its global paid streaming video members by 8.84 million in the fourth quarter of 2018, falling below its prior-quarter guidance predicting global paid net additions of 9.4 million. That represented 1.5 million domestic subscribers and 7.3 million internationally.

Across its content investments, the company spent about $7.5 million in content in 2018, Chief Product Officer Greg Peters said, and the company expects that to grow in a "similar trajectory" as in recent years.

Chief Content Officer Ted Sarandos expressed excitement about the global potential of hits like "Bird Box" and "the potential scale of the content business when the world is excited about something."

"Bird Box" was viewed by over 80 million households, the company said in its release. While Netflix rarely shares specific viewer date, Sarandos said this kind of information would become more common in the future.

Side-stepping a question about content leaving the platform in 2019, including hit movies from Walt Disney Co., Sarandos said the early investment in original content six years prior was a bet that third-party studios would eventually opt not to license content to Netflix. "Today ... the vast majority that's watched on Netflix is our original content brands," he said, though he acknowledged that the company would remain a buyer of second-run content where studios make it available.

For the first quarter of 2019, Netflix said it expects paid memberships to climb by 8.90 million, to 148.16 million. Investor relations lead Spencer Wang said the forecast was intended to include the potential impact of Netflix's price increase on membership growth.

On quarterly financials, the company reported fourth-quarter 2018 revenue of $4.19 billion, up 27.4% year over year and just below guidance of $4.20 billion. Netflix forecast that first-quarter 2019 revenue would climb 21.4% year over year to $4.49 billion.

Netflix reported fourth-quarter net income of $134 million, or 30 cents per share, down from 186 million, or 41 cents per share, in the prior-year period. The fourth quarter of 2018 was impacted by a $22 million noncash unrealized gain from foreign-exchange remeasurement on euro-denominated debt, and its operating margin of 5.2% was impacted by a large fourth-quarter content-release cycle.

The fourth-quarter 2018 consensus EPS estimate was 24 cents, according to S&P Global Market Intelligence.

Netflix expects first-quarter 2019 EPS of 56 cents. The S&P Global Market Intelligence consensus EPS estimate for the first quarter was 83 cents on a GAAP basis.