Streaming video veteran Netflix (NASDAQ:NFLX) reported fourth-quarter results after the closing bell on Thursday. The company added more subscribers than expected but top-line revenue still came in a bit light. Here's a closer look at Netflix's fourth quarter.

Netflix's fourth-quarter results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$4.19 billion

$3.29 billion

28%

Net income

$134 million

$186 million

(28%)

GAAP earnings per share (diluted)

$0.30

$0.41

(27%)

Free cash flow

($1.32 billion)

($524 million)

(152%)

Global paid streaming subscriber additions

8.84 million

6.62 million

34%

Data source: Netflix.

What happened with Netflix this quarter?

  • This quarter was a bit of a mixed bag in terms of living up to guidance targets. Revenue was expected to grow 27.8% year over year but the growth stopped at 27.4%. Net income came in 28% above the guidance target as net margins landed at 5.2% -- 30 basis points above the expected 4.9% margin.
  • The company added 8.84 million net new paid subscribers during the quarter, divided between 1.5 million domestic customers and 7.3 million new international accounts. The domestic performance was right in line with Netflix's guidance and the overseas additions exceeded the stated target of 6.1 million new names.
  • Netflix provided guidance targets on 27 different business metrics in the third quarter. The company exceeded these estimates in 11 cases, from subscriber growth and operating profits to bottom-line earnings per share. Another six guidance targets were provided for metrics that weren't reported at all in this quarter, as Netflix refocused its reporting on paid subscribers to the exclusion of the formerly ubiquitous "total memberships" figures.
  • Looking ahead, Netflix offered first-quarter guidance for a more svelte set of 19 metrics this time.
  • Top-line revenue came in slightly below expectations despite a strong performance in terms of subscriber growth. Management pointed to currency exchange headwinds as the chief driver of this miss. On the other hand, the same currency effects added $22 million to Netflix's net income as the euro-denominated debt was remeasured at a more beneficial exchange rate.
  • Netflix now serves 58.5 million paid domestic subscribers and 80.8 million customers overseas for a grand total of 139.3 million. That's up from 52.8 million, 57.8 million, and 110.6 million, respectively, in the year-ago period. In other words, fourth-quarter revenue rose 28% year over year on a 26% increase in global customer counts.
Happy young woman on the couch with a TV remote and a bucket of popcorn.

Image source: Getty Images.

What management had to say

Netflix is increasing the monthly fees for U.S. customers as we speak, having already started with higher prices for new subscribers and preparing to roll out the same changes for existing customers over the next couple of quarters. In a conference call with UBS analyst Eric Sheridan, Chief Product Officer Greg Peters explained how Netflix arrived at this decision.

"I think the model we've got is a fairly simplistic one," Peters said, "where we think our job is to effectively invest the money that our subscribers give us every month so that we can give them incredible content and a better and better product experience. And if we do that well, we create more value for our subscribers and then occasionally we'll come to them and we'll ask for a little bit more money so that we can actually start that next cycle of investment."

CEO Reed Hastings weighed in with this quick analysis of Netflix's overall business model:

"It's the same virtuous cycle," Hastings said. "Improve the service for our members, we grow, that gives us more money to invest. So it's the same things we've always been doing, at just greater scale."

Looking ahead

  • In the first quarter of 2019, Netflix expects revenue to grow 21% year over year and land near $4.49 billion.
  • Operating margins will be compressed to roughly 8.9% -- up from 5.2% in the fourth quarter but down from 12.1% in last year's first quarter -- due to a larger volume of original content productions.
  • On the bottom line, that should translate into earnings in the neighborhood of $0.56 per share. Hitting that target would work out to a 13% drop from the year-ago period's earnings of $0.64 per share.
  • The company doesn't offer firm guidance for free cash flows, but management did update its cash flow aims in broad strokes. Netflix expects to consume roughly $3 billion of free cash flows in 2019, similar to the reported result for fiscal year 2018. Beyond that, widening operating margins should start to shrink the negative cash flows in 2020 and beyond.
  • The company will continue to tap the debt markets for additional funding until further notice. Management estimates "marginal after-tax cost of debt to be lower than our marginal cost of equity," which is another way of saying that low-interest loans should give Netflix's shareholders more bang for the buck than issuing new shares amid rapidly rising share prices.

Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.