Plenty of drama engulfed the video streaming wars this week with Disney, Hulu and AT&T all chopping and changing strategies as the industry attempts to get to grips with how each will send any sort of tribulation the way of Netflix. Of course, then came the small matter of Netflix filing its first quarter financial report and inevitably blowing estimates out of the water. In other words, “Take a seat, kids, this is how it’s done.”
Netflix onboarded a record 9.6 million new subscribers in Q1 2019, a 16% year on year increase, to total just shy of 150 million paid subscribers (148.86 million to be precise) globally, while an additional 6.6 million sit on free trials. Domestically, Netflix picked up 1.7 million new subscribers, just over half a million less than in Q1 2018, while 7.9 million came from overseas, a substantial increase of 1.9 million over Q1 2019.
A modest 5 million global additions have been projected for the second quarter to bring Netflix to 154.9 million subs worldwide, due to Netflix foreseeing knock on effects regarding its recent price hikes. Yet most forecasts continue to grossly underestimate Netflix’s pulling power. Quite simply, no one – not even us – predicted Netflix’s record breaking run to continue to break through the 150 million subscriber barrier so soon.
We have said in the past how Netflix has been virtually immune to price hikes given its dominant position and continued content commitments but as the hikes become more widespread, outside of core markets like the US and UK and into regions with less developed infrastructure and much cheaper alternatives, uptake may slow. There is little doubt though that Netflix will continue to defy critics with more record breaking figures in the coming quarters.
But behind the numbers, we were treated to a little something extra in the company’s latest earnings. Sensing the demand for granular data, both from a business perspective as well as consumer viewpoint, Netflix hopes subscribers and producers will perceive it as a much more transparent business in the future by offering additional engagement statistics. The implications appear to be cross-platform, as executives said during the call that helping subscribers and producers make better decisions is often influenced by what is being viewed in the wider media landscape.
CEO Reed Hastings touched briefly on the bigger picture for Netflix subscribers, saying during this week’s call, “Our members are watching pay-per-view and DVDs, our members are watching linear, our members are watching Fortnite. It’s all of these things. So, think of it as the real metric being can we keep our members happy and grow that subscriber base?” Of course, Hastings famously described Fortnite recently as his company’s biggest competitor in an amusing dig at the company’s more obvious OTT video rivals.
Chief Content Officer Ted Sarandos said, “We’re going to be rolling out more specific granular reporting first to our producers and then to our members and of course to the press over time and be more fully transparent about what people are watching on Netflix around the world.”
This implies Netflix might implement some form of ranking system for titles, available to general public, while internally it sounds like Netflix is cooking up some sort of master data pot – stirring in viewing figures from its own titles in combination with time spent on rival platforms – for which producers and executives can make informed decisions. More on these intriguing data revelations throughout the year, we hope.
Back to the balance sheet now. Revenues were up an impressive 22.2% to $4.5 billion for Q1, albeit a slowdown from the 40.4% year on year revenue growth achieved in Q1 2018. Operating income turned a corner from the previous quarter, almost doubling to $459 million, meaning net income enjoyed a jump of 18.6% year on year to $344 million.
Netflix is accustomed now to breaking records although an unfamiliar achievement adorned its most recent results, one it won’t want to flaunt, as the company’s quarterly streaming content obligations declined for the first time since its streaming content obligations began. The company’s content spend has famously increased to unprecedented levels in recent years, peaking at $19.3 million in Q4 2018, yet this mysteriously dropped off to $18.9 million in the previous quarter. While Netflix might not be proud of losing its growth streak, some investors might breathe a sigh of relief at seeing the trend bucked.
The reason, according to a Netflix statement, was “due in part to the timing of run-of-series commitments. In addition, as we shift to more original content, there will be greater variability in content obligations quarter to quarter due to the timing of when productions start.” The company did not provide estimated streaming content obligations for the next forecast.
Surprisingly, ARPU slipped by 2% year on year to $11.60 despite rolling out price hikes across prime markets in the US, Europe and most recently Latin America.
Touching quickly on technology, revenues from the Technology and Development division declined again to $282.3 million for Q1 2018, down from $372.8 million a year earlier. Any elaboration on this shrinkage was absent from the earnings call and announcements this week, but it’s worth keeping a close eye on the developments of the AV1-based technology called Scalable Video Technology for AV1 (SVT-AV1) – a collaboration between Netflix and Intel announced just last week.
The software-based scalable codec claims 50% bandwidth efficiency over AVC while maintaining video quality, achieved partly through Intel’s acquisition of eBrisk last year – enabling faster AV1 algorithm development in the open source community which Netflix and Intel hope will spur innovation in video compression. Intel network platforms group VP and GM of the visual cloud division Lynn Comp said, “This codec makes it possible for services ranging from video on demand to live broadcast of 4Kp60/10-bit content on Intel Xeon Scalable processors, including the recently launched 2nd-Generation Intel Xeon Scalable processor.”