In its fourth quarter, Netflix (NFLX 1.74%) proved to investors that its recent acceleration in subscriber growth wasn't short-lived. The company added a record 8.33 million new streaming members, up from 5.3 million net member additions in Q3 and 7.05 million in the year-ago quarter. It was a "beautiful" quarter, management said in the company's quarterly shareholder letter.
As investors reveled in the quarter's impressive numbers, Netflix stock has surged higher. The stock jumped nearly 16% in the three trading days following the earnings release. With the stock climbing sharply higher, some investors may be looking for more insight into the quarter to see if the move is justified. Look no further than Netflix's fourth-quarter earnings call, where management provided more context on its subscriber growth, content spending growth, and expectations for Walt Disney's (DIS 0.56%) streaming service.
Image source: Netflix.
The drivers behind Netflix's impressive subscriber growth
Management addressed its bigger-than-expected subscriber growth in its fourth-quarter shareholder letter, but it didn't get very specific. It simply said a strong original content slate and ongoing growth in internet TV played a key role in the growth. But management shared more details about the growth during the fourth-quarter earnings call.
As far as its content went, Netflix Chief Content Officer Ted Sarandos cited its new film Bright and season two of Stranger Things as content that "not only landed really well with viewers and consumers but also were perfectly global, meaning that the watching was distributed almost exactly like our member base is."
Netflix CEO Reed Hastings shifted toward the significant impact of overall growth in internet TV, saying he can tell it's a strong secular trend since Hulu and YouTube are also growing. "[I]t's great that we're keeping up with this big internet-driven transformation and that we're pleasing our members with this extraordinary 8 million net-add quarter," Hastings explained.
Finally, Netflix CFO David Wells admitted management was a little conservative on estimating how recent price changes could moderate its subscriber growth during the quarter. But subscriber growth appeared undeterred by higher prices.
Big content spending won't plateau at $8 billion
Asked about Netflix's impressive commitment to $7.5 to $8 billion of spending on new content on a profit-and-loss basis in 2018, Hastings was careful to point out that it doesn't expect its spending on content to plateau at this level:
[I]t will definitely, of course, be higher in 2019 and 2020. So, don't think of it as $8 billion is some new plateau. Instead, it's just a point in time as we grow both the revenue and our content budget.
Sarandos explained how Netflix decides on the growth trajectory of its content spending:
So, we keep investing forward based on the confidence of how we're doing, and at some point, if we're not growing viewing hours, we're not growing subs, we're not growing in enjoyment, then you've hit a point of diminishing returns. And we just haven't seen that yet.
Netflix applauds Disney streaming plans
Netflix management didn't hold back its praise for Disney's biggest strategic decisions lately. Netflix seemed bullish on both Disney's recent move to acquire some of Twenty-First Century Fox's (FOX +0.00%) assets in a deal valued at about $52 billion and its plans to launch a streaming service.
Chris Hemsworth as Thor in Thor: Ragnarok. Image source: Walt Disney.
Hastings explained:
Well, I was as surprised as anyone else that Fox was willing to sell, and to have all those cable networks together in one bundle gives them tremendous pricing power against MVPDs [(multichannel video programming distributors)]. So, I could see the attractiveness of it. And then they're also putting together a Disney direct-to-consumer service, which we think will be very successful because Disney has super strong brands.
Does Disney's likely success with its streaming service mean Netflix is in trouble? Not according to Hastings. "We don't see it as a threat to us any more than Hulu has been, but it's a great opportunity for them," he said.
Overall, Netflix's fourth-quarter conference call reinforced the company's impressive performance and the strength of its market opportunity as consumers continue to turn increasingly toward internet TV for their entertainment.
