Netflix Adds 8.8M Paid Streaming Subs in Q4, Expands to 139M Worldwide

In the wake of plans to raise prices across the board in the US, Netflix said it added a record 8.84 million paid streaming subscribers – 1.5 million in the US and 7.3 million internationally --- in Q4 2018, pushing its global total past 139 million.

Q4 subscriber results, which were up 25.9% year-on-year, beat Netflix Inc. (Nasdaq: NFLX) guidance that it would add 7.6 million paid subs in the period. The company expects to add 8.9 million subs in Q1 2019 and end the period with 148.16 million.

Netflix said Q4 revenues were $4.19 billion, short of the $4.21 billion that Wall Street expected. Netflix shares were down $11.19 (3.17%) to $342.05 in after-hours trading Thursday.

Netflix said it expects its new, higher pricing in the US -- for new members today and to be phased in for existing members over Q1 and Q2 2019 -- will lift its average selling price numbers, which rose 3% in Q4. Netflix increased pricing in Canada and Argentina in Q4 2018, and in Japan in Q3 2018. (See Netflix Raises Prices as Content Spending, OTT Competition Heat Up.)

Netflix execs will likely be asked during today's analyst call how much they expect the US price increase to boost subscriber churn rates. Earlier this week The Diffusion Group (TDG) released a consumer study indicating that 16% of Netflix subs are likely to either downgrade to a lower tier or cancel the service altogether if the price rose just $1 per month. (See Study: 8% of Netflix Subs Likely to Cancel Service Amid $1 Price Increase.)

Despite some analyst concerns about its heavy spending on content, Netflix has no plans to slow that pace down, and expects to continue to splash cash even more heavily on originals as other studios and programmers start to pull back rights to movies and TV shows for their own, forthcoming OTT video services.

"We are ready to pay top-of-market prices for second-run content when the studios, networks and producers are willing to sell, but we are also prepared to keep our members ecstatic with our original content if others choose to retain their content for their own services," Netflix said in its Q4 investor letter.

Netflix also took some swipes at its competition. "We compete with (and lose to) Fortnite more than HBO," the company said. "Our focus is not on Disney+, Amazon or others, but on how we can improve our experience for our members." (See Disney Dispenses Details About Its New Streaming Service.)

Netflix finished the year with $3.8 billion of cash and said its $500 million unsecured credit facility remains undrawn. In Q4 2018, it had $19.3 billion in streaming content obligations.

"Worryingly, the company is burning through a lot of cash," Paolo Pescatore, an independent tech, media and telco analyst, said in a note reacting to Netflix's Q4 results. "It needs to recoup this by adding customers more quickly, increasing prices or taking on more debt. Therefore, expect price rises in all key markets."

He said 2019 will be "pivotal" for Netflix as new rivals hold back programming and spawn their own OTT services. "The market will be awash with video services. Users will be spoilt for choice, maybe a bit too much," Pescatore added.

Update: Q4 call spans spending trends, new bundling models
Netflix's heavy spending on original content came up on today's call. Spencer Neumann, Netflix's new CFO who is late of Activision Blizzard, said the company feels "great about our content investment" but that the company would be looking to improve the cash flow of the business, which was at -$3 billion in 2018.

"Ultimately, our aspiration is to be self-funding, and we believe that we will do that over time with these content investments," Neumann said, adding later that, in the meantime, accessing the debt markets is the path Netflix will continue to take.

Netflix will also continue to explore the bundling model with its various mobile and pay-TV partners, including a recent hook-up with Sky.

"We're early on in that process," said Greg Peters, Netflix's chief product officer, noting that Netflix bundling has become a "nice supplemental channel" that helps the service tap into new segments of the consumer market.

"We're quite excited in the results we are seeing," he said. "We're going to grow that segment of the business, but it's still small in terms of [subscriber] acquisition impact."

The impact of media companies that are launching their own OTT services and could keep their content out of Netflix's hands also came up.

Ted Sarandos, Netflix's chief content officer, said the majority of content watched on the service come from its original content brands, but that Netflix is "still a buyer in that second-run market" but that "it's really up to the seller if they want to continue to sell."

— Jeff Baumgartner, Senior Editor, Light Reading

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