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Netflix execs see marginal impact from competition, reiterate financial strategy


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Netflix execs see marginal impact from competition, reiterate financial strategy

As competition mounts, Netflix Inc. is confident that the streaming market will continue to grow and its investments in content will help the company maintain its leadership position, with home-entertainment market-share losses coming not from its own legacy platform but from linear TV.

New streaming video competition from The Walt Disney Co. and other media companies impacted Netflix's fourth-quarter 2019 membership growth in the U.S. and Canada, and it will continue to see an impact on net paid membership additions as those competing platforms expand globally in 2020. However, Netflix does not expect that competition to materially weigh on its ability to grow, invest in new content and continue on its path to becoming cash flow positive.

Netflix expects 7.0 million paid net membership additions in the first quarter, which is slower than the 9.6 million additions in the 2019 first quarter. With Disney's streaming platform Disney+ expanding globally during the year and other new services coming to market, such as AT&T Inc.'s HBO Max and Comcast Corp.'s Peacock, Netflix is "trying to be prudent" in regard to membership guidance, CFO Spencer Neumann said on a Jan. 21 earnings webcast. And despite potentially slower membership growth, per-member viewing rates grew in the fourth quarter, and average revenue per user grew 9%, executives said on the webcast. While price increases negatively impacted membership growth in 2019, the increased ARPU is partly due to slow but steady migration of subscribers to higher-price membership plans, correlated to the increased use of smart TVs and 4K TVs.

Netflix expects to continue to increase its content spending while steadily working toward a positive free cash flow position. The company spent about $15 billion on original content in 2019, up from about $12 billion in 2018, and it will continue to increase that spending by about 20% this year, Neumann said. Meanwhile, the company expects the $3.3 billion cash flow loss in 2019 to be the peak negative position for cash flow. It forecast negative free cash flow of $2.5 billion in 2020.

"That's not coming from shrinking back our content spending. That's coming from increase in revenue and operating income," CEO Reed Hastings said on the webcast.

The increases in content spend will include continued investments in feature films, executives said. They touted their position as the highest Oscar-nominated content studio for its 2019 slate and said its first- and second-quarter slate looks just as strong as the quality achieved in 2019, with new feature films including stars such as Charlize Theron and Mark Wahlberg. While some analysts argue that original series are more valuable in keeping members on the platform and returning to the platform, executives said they believe films travel better, which makes them more valuable in the global market — and the success of Netflix's films with both members and the Academy justifies the high investment.

Netflix will continue to ramp its film investment going forward, executives said.

The company's cash position is the most misunderstood part of the business, Neumann said. "Folks [are] thinking we are losing money, and what we're showing is that we're increasing our profitability," he said. The transition from a business model that relied primarily on licensed content to a business model that relied on original productions required large up-front investments to begin executing on production goals many years ahead of release on the platform. The company's membership growth and financial position are now catching up with those investments, as illustrated by a leveling out in cash flow losses, executives explained.

In the fourth quarter, Netflix reported global paid membership growth of 20.0% to 167.09 million members, up by 8.76 million members, well outpacing its forecast for 7.6 million paid net additions.

On financials, the company reported quarterly net income of $587.0 million, or $1.30 per share, compared to $133.9 million, or 30 cents per share, in the prior-year quarter. For the full year, net income came to $1.87 billion, or $4.13 per share, compared to $1.21 billion, or $2.68 per share, reported in full year 2018.

The S&P Global Market Intelligence consensus EPS estimate for the fourth quarter and full year were 53 cents and $3.36 per share, respectively.

Netflix's quarterly revenue jumped 31% year over year to $5.47 billion, up from $4.19 billion a year ago. Full-year revenue climbed to $20.16 billion from $15.79 billion in 2018.

The company said it expects first-quarter 2020 net income of $750 million, or $1.66 per share. First-quarter global paid net additions are expected to be 7.0 million, compared to 9.6 million in the first quarter of 2019, which was an all-time high in quarterly paid net addition, the company said.