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Netflix Adds the Most Quarterly Subscribers in Its History

Danny Vena, The Motley Fool

Expectations were muted going into Netflix's (NASDAQ: NFLX) first-quarter earnings report on Tuesday. Two potentially formidable competitors, Disney and Apple, had recently released additional details about their upcoming streaming offerings. In the two market days after Disney's reveal last week, Netflix stock fell nearly 7% over concerns that the lower price point offered by the House of Mouse -- $6.99 per month -- might eat into Netflix's subscriber base once it launches in November.

For now, those concerns don't seem to be stopping Netflix from continuing to post unfettered growth, even in the face of looming competition. The streaming giant reported nearly 149 million subscribers worldwide, an increase of 25.2% year over year.

Just in Q1, Netflix added a record 9.6 million new subscribers, the highest quarterly rate for paid additions in its history and a jump of 16% year over year. That number included 1.74 million new U.S. customers, pushing the total to 60 million, a threshold Netflix has long said it would reach. The company added 7.86 million new members internationally, growing the total to nearly 89 million. 

Kevin Costner and Woody Harrelson in 1930's era clothing sitting in a period car.

Kevin Costner and Woody Harrelson in a scene from the Netflix original, The Highwaymen. Image source: Netflix.

Show me the money

The strong subscriber growth resulted in strong financial metrics. Revenue grew to $4.521 billion, up 22.2% year over year. That was just above analysts' consensus estimates of $4.5 billion. Net income of $344 million produced earnings per share (EPS) of $0.76, up 16% compared to the prior-year quarter and sailing past expectations of $0.57 EPS.

Contribution profit in the U.S., Netflix's most mature market, was 34.4%, down slightly from the 34.8% achieved at the same time last year. Even with significant content investment, international contribution margin grew to 11.6%, up from 9.8% in the year-ago quarter.

Free cash flow (FCF), another area of perennial interest, was negative $460 million compared to negative $287 million in the prior-year quarter, driven by continued investment in original programming. As a reminder, original content costs more upfront than licensed programming. The latest projections by Netflix indicate that FCF will be worse in 2019 and reach negative $3.5 billion, up from the negative $3.0 billion it originally expected. The company still anticipates an improvement in 2020 and every year thereafter.

What are we gonna watch?

As it did last quarter, Netflix spent a bit of its missive giving investors updates on some of its hit shows. Triple Frontier, the action-heist movie starring Ben Affleck was viewed by over 52 million member households during the first four weeks of its release. The Highwaymen, starring Kevin Costner and Woody Harrelson as lawmen on the hunt for Bonnie and Clyde, is on track to top 40 million viewings in its first month.

The company also gave a nod to Our Planet, which it called "our most ambitious entry into the popular nature documentary genre." The program, which was shot in 50 countries and was four years in the making, is projected to be seen by 25 million households in its first month.

It's important to note that some feel these metrics -- which occasionally use projected figures and can't be independently verified -- are virtually meaningless without context. However, since Netflix isn't beholden to advertisers, the company doesn't feel the need to further detail its viewer metrics to the naysayers.

A group of tigers, with one staring off into the distance.

A scene from Netflix original Our Planet. Image source: Netflix.

A nod to the competition

In its first-quarter shareholder letter, Netflix acknowledged the looming competition. "Recently, Apple and Disney each unveiled their direct-to-consumer subscription video services. Both companies are world class consumer brands and we're excited to compete ... We don't anticipate that these new entrants will materially affect our growth," the letter said, citing the transition from broadcast and cable TV to streaming being "so massive" that it can support multiple competitors.

Netflix also said the beneficiaries of the growing competition would be content creators and consumers "who will reap the rewards of many companies vying to provide a great video experience for audiences."

Taxes and forecasting

For the upcoming second quarter, Netflix is forecasting revenue of $4.93 billion (up 26.1% year over year), operating margins of 12.5% (up 400 basis points), and EPS of $0.55 (down 16% compared to the prior-year quarter). The company is also guiding for global subscriber gains of 5 million, down from 8.26 million at the same time last year.

Wall Street seemed disappointed with the forecast. Analysts' consensus estimates were calling for revenue of $4.95 billion (up 26.6%), and EPS of $0.99. This is significantly higher than management's estimate, which accounts for the market's disappointment. A close look at the details, however, reveals the culprit: Netflix is anticipating an effective tax rate of 48% in Q2 -- the result of one-time discrete events -- which more than accounts for the difference.

You'd think a record quarter of subscriber growth would receive a more positive response. In-the-know investors will ignore the short-term gyrations of the market and keep their eyes on the long growth runway ahead for Netflix.

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Danny Vena owns shares of Apple, Netflix, and Walt Disney and has the following options: long January 2021 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.