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3 Things Netflix Management Wants You to Know

By Daniel Sparks – Apr 17, 2019 at 4:01PM

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Don't miss these important excerpts from Netflix's first-quarter shareholder letter.

Netflix (NFLX 0.16%) just posted another quarter of strong growth. Subscribers increased by nearly 10 million, representing record growth. Revenue increased 22% year over year, or 28% in constant currency.

But there's more to the quarter, of course, than these headline figures. In the company's first-quarter shareholder letter, management provided a closer look at its operations and more insight about its expectations for the rest of the year. Here are three takeaways from the letter. 

A group of young people watching TV.

Image source: Getty Images.

Netflix's price increases are going well

Earlier this year, Netflix announced meaningful price increases in the U.S. While the increases were effective immediately for new subscribers, they would take three months to roll out to existing subscribers. Increases are also rolling out in other international markets.

Fortunately, members seem undeterred by the price increases, suggesting things will go smoothly for Netflix as the rest of its price increases take place.

We're working our way through a series of price increases in the US, Brazil, Mexico and parts of Europe. The response in the US so far is as we expected and is tracking similarly to what we saw in Canada following our Q4'18 increase, where our gross additions are unaffected, and we see some modest short-term churn effect as members consent to the price change.

Price increases will be good for business. Netflix expects average revenue per user to accelerate during the current quarter. Management guided for average revenue per user to increase 2% year over year in Q2, up from a decline of 2% year over year in Q1. In constant currency, management expects average revenue per user to rise 7% year over year in Q2.

Expect an exciting second half of 2019

Though Netflix surprisingly guided for streaming paid net member additions of five million in Q2 -- less than the 5.45 million it added in the second quarter of 2018, the company expects growth to kick into high gear in the second half of the year as the company rolls out lots of new, quality content.

We're looking forward to a strong slate of global content in the second half of the year, including new seasons of some of our biggest series, Stranger Things (July 4th), 13 Reasons Why, Orange is the New Black, The Crown and La Casa de Papel (aka Money Heist) as well as big films like Michael Bay's Six Underground and Martin Scorsese's The Irishman.

Helped by this aggressive content-launch schedule, management said investors can expect record annual paid net member additions for the full year of 2019.

Netflix believes its addressable market remains significant

With nearly 150 million paid members, some investors may worry the company's growth opportunity is nearly tapped out. Netflix, however, believes there's significant runway ahead. Indeed, management asserts that there's so much room that new entrants in the space like Apple and Walt Disney are unlikely to have a material impact on Netflix at all.

We believe we'll all continue to grow as we each invest more in content and improve our service and as consumers continue to migrate away from linear viewing (similar to how US cable networks collectively grew for years as viewing shifted from broadcast networks during the 1980s and 1990s).

Driving this point home, Netflix pointed out that its streaming hours in the U.S. only represent about 10% of TV viewing.

Daniel Sparks has no position in any of the stocks mentioned. 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.

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