Netflix CEO Reed Hastings gives a keynote address at the CES 2016 Consumer Electronics Show in Las Vegas, Nevada, January 6 2016. Picture: AFP/ROBYN BECK.
Netflix CEO Reed Hastings gives a keynote address at the CES 2016 Consumer Electronics Show in Las Vegas, Nevada, January 6 2016. Picture: AFP/ROBYN BECK.

Los Angeles — Netflix’s “Bird Box,” “You” and other new programmes helped attract millions more subscribers to the streaming service last quarter. But slower sales growth disappointed investors riding high on a 50% stock gain in recent weeks.

While revenue grew 27% to $4.19bn in the fourth quarter, that came up short of the $4.21bn projected by Wall Street. The forecast for current-quarter sales also missed estimates. Netflix shares were down 3% in pre-market trading at 4.50am in New York.

The results suggest that Netflix’s unprecedented spending spree on new movies and shows may not pay off as quickly as expected — despite the buzz for hugely popular hits such as the horror movie “Bird Box,” which was seen by 80-million subscribers.

The online entertainment company said on Thursday that paid memberships increased by 8.84-million in the fourth quarter, beating its own forecast made in October. It predicted a record 8.9-million new customers worldwide in the current first quarter, but that’s up only slightly from the period just ended.

“Management is taking a cautious tone,” said Geetha Ranganathan, an analyst at Bloomberg Intelligence. The light subscriber forecast for the current quarter is partly the result of the price increase Netflix announced Tuesday. “The long-term investment story remains intact given overseas additions are projected to rise 22%,” she said.

Cash flow

Netflix is racing to keep its huge lead in an increasingly crowded field of streaming services, with competitive offerings coming from Walt Disney Co and AT&T’s WarnerMedia later in 2019. The company’s long-term programming budget stood at $19.3bn at year end, up from $18.6bn three months earlier.

“There’s a billion hours of television content being consumed today — we’re winning about 10% of it,” CEO Reed Hastings said in an online Q&A. “We don’t get so focused on any one competitor and really think our best way is to win more time by having the best experiences.”

Netflix’s operating margin — an indication of its ability to turn sales into profit — shrank in the quarter, because of the heavy load of titles released. In addition to “Bird Box,” 40-million households watched a series called “You,” about a stalker. The top unscripted show was the much-talked-about programme on housecleaning called “Tidying Up with Marie Kondo”. The company also called out the successes of content overseas from Turkey and the UK.

For this year, Netflix expects negative cash flow of about $3bn, in line with 2018. The losses will start to shrink thereafter, the company said.

The slower-than-expected growth will put more of the spotlight on a recent price increase. The California-based company said this week it was hiking its rates by $1 to $2 a month in the US

Still, most of Netflix’s growth is coming from overseas. The company believes that international markets will one day account for as much as 90% of its customer base. The company signed 7.31-million new paid customers outside the US in the fourth quarter, or about 83% of all new subscribers.

Netflix’s investment in original content starting six years ago was a bet that studios and networks would eventually look to do their own streaming, said Ted Sarandos, chief content officer. The service still has plenty of second-run programmes, he said, but the momentum had shifted toward its original fare.

“We have shows like ‘Grey’s Anatomy’ or ‘Friends,’” he said. “But if you stack all of the viewing — like top 50 or top 25 most watched shows, by seasons, or by series — it’s dominated primarily by our original content brands.”

Profit for the fourth quarter came to 30 US cents a share, beating the 24c average of analyst estimates. This quarter, the company is predicting earnings of 56c, short of the 85c average Wall Street forecast. The company said sales will be $4.49bn, compared with analysts’ projections of $4.6bn.

Despite the shaky stock reaction, Raymond James analyst Justin Patterson sees more positives than negatives.

“Overall, 2019’s off to a positive start,” he said in a note.