Netflix, Inc. Shrugs Off Price Increases to Grab 8.3 Million New Subscribers

Streaming-video pioneer Netflix (NFLX -9.09%) reported earnings Monday night. The report covered results from the fourth quarter of fiscal year 2017, where Netflix added 8.3 million new subscribers while raising membership fees.

Netflix's fourth-quarter results: The raw numbers

Data source: Netflix.

What happened with Netflix this quarter?

• Netflix had hoped to add 1.25 million net new subscribers in the domestic market and another 5.05 million abroad. Instead, U.S. additions stopped at 1.98 million while 6.36 million international members signed on.
• Global streaming revenues increased by 35% year over year, well ahead of the 25% higher subscriber counts. Average subscription fees came in at $9.02 per month, up from $8.77 per month in the third quarter and $8.36 per month in the year-ago period. Subscription fees are on the rise both domestically and abroad.
• The strong subscriber additions were driven by global interest in Netflix Originals plus "the ongoing adoption of internet entertainment."
• Subscriber addition guidance included some expectation that price increases might put a lid on the growth rates. The actual results suggest that the streaming service is seen as an affordable entertainment option thanks to the high quality of Netflix's unique content.

Image source: Netflix.

What management had to say

When asked about how Netflix views the competitive landscape, CEO Reed Hastings explained that he likes to watch and learn from the wins and mistakes of other video services.

Watch what they do and then learn from consumers -- do they really love it? It doesn't change our strategy. So think of us as, our thing is working and what we have to do is not get distracted. We have to do content at a scale very few people have ever done before. We have to do marketing and product with that, and if we do that, the rewards should be very solid for us.

So we've got a path ahead. Everyone else in streaming is trying to find one. And again, we have to watch them and learn.

Looking ahead

Thanks to a series of encouraging marketing tests, Netflix is increasing its advertising budget to roughly $2 billion in 2018. That line item stopped at $1.3 billion in 2017. CFO David Hastings stated that increased marketing turned out to "amplify the value of our content" to a significant degree.

In the first quarter of 2018, management's guidance points to roughly 6.4 million subscriber additions. About three-quarters of these new members should come from the international segment.

Top-line sales are expected to land near $3.7 million, which would accelerate year-over-year sales growth to 39.8%. The full effect of those fee increases has clearly not made it on to Netflix's income statement yet.

On the bottom line, GAAP earnings should be approximately $0.63 per diluted share, up from $0.40 per share in the first quarter of 2017. The company doesn't issue detailed guidance for free cash flows, but it did issue a full-year target. In 2017, Netflix consumed $2 billion of free cash. Next year, that sum should land between $3 billion and $4 billion as the company continues to ramp up its production of original content. The high cash costs will probably be funded by another trip to the debt market.