Netflix Inc. attracted a record number of paying subscribers in the first quarter of 2019, but may have accelerated profit growth that could have been spread throughout the year, and shares declined in after-hours trading Tuesday.
Netflix NFLX, -0.82% reported the addition of 9.6 million new paying subscribers in the first three months of the year, a record for a single quarter. The streaming-entertainment company reported earnings of $344 million, or 76 cents a share, up from 64 cents a share a year ago. Revenue for the quarter was $4.5 billion, up from $3.7 billion in the same period last year.
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Analysts on average expected Netflix to report earnings of 58 cents a share on sales of $4.5 billion, according to FactSet. Analysts projected 8.06 million new paying subscribers, after Netflix said it expected to add 8.9 million paying subscribers. Investors focus much more on Netflix’s subscriber count than its financial performance, because it is more predictive of where Netflix’s finances are going, and is especially important amid new competition.
Netflix’s report arrives after two high-profile debuts of new rival streaming services from companies accomplished at attracting consumer eyeballs (and dollars): Apple Inc. AAPL, -0.08% and Walt Disney Co. DIS, -1.62% . In its previous earnings report, Netflix altered its quarterly view of the competition to note that it competes with much more than just other streaming services, though, and on Tuesday executives insisted there is plenty of growth available to multiple streaming services as more consumers move away from traditional television services.
“We don’t anticipate that these new entrants will materially affect our growth because the transition from linear to on-demand entertainment is so massive and because of the differing nature of our content offerings,” Netflix executives said in a letter to shareholders Tuesday.
The company’s forecast for the second quarter was lighter than expected, though, both in profit and new subscribers. Netflix projected second-quarter earnings of 55 cents a share, which would be down from 85 cents a share a year ago and well lower than analysts’ estimates of 99 cents a share. Netflix expects 5 million new paying subscribers in the second quarter, while analysts were projecting 5.3 million on average, but Netflix executives said they “expect another year of record annual paid net adds in 2019,” which means topping 2018’s total of 28.6 million new paying subscribers.
The biggest deficit was in U.S. subscribers — netflix expects only 300,000 new paying subscribers in the U.S., while analysts were expecting more than double that total. Netflix is increasing prices in the U.S., and noted in its letter that price increases can lead to “some modest short-term churn effect.”
Some of the costs of running the business were shifted to later in the year as well, and there seems to be more potential concerns about costs for the rest of 2019.
“Operating margin of 10.2% exceeded our beginning-of-quarter expectation as some spending was shifted from Q1 to later in the year,” Netflix explained in the letter to investors, while maintaining a goal of a 13% operating margin for the full year.
Netflix increased its estimate for how much money it will spend this year, saying that it now expects its free-cash flow deficit to be around $3.5 billion, as it continues to pay for new content. Executives cited “higher cash taxes related to the change in our corporate structure and additional investments in real estate and other infrastructure.”
Netflix said it expects a higher effective tax rate this year, including a 48% rate in the second quarter, “due to one-time discrete events.”
Netflix shares closed 3% higher Tuesday, at $359.46, then declined to less than $350 in immediate late trading after the numbers were released, but later rebounded a bit to a loss of about 1.5%. The stock has increased 17.2% in the past year, as the S&P 500 index SPX, +0.05% has gained 8.5%.
Netflix Inc. shares fell $2.61 (-0.73%) in after-hours trading Tuesday. Year-to-date, NFLX has gained 34.30%, versus a 16.61% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of MarketWatch.