Netflix earnings to highlight big bet on content spending

Four days before Christmas, Netflix gifted subscribers with Bird Box, a post-apocalyptic thriller in which Sandra Bullock’s character has to wear a blindfold to avoid her destruction. It became the streaming equivalent of a blockbuster. Netflix claims 45m people watched Bird Box in the first week of its release, while television ratings group Nielsen says 26m people viewed it in that time.

The film’s popularity was helped by social media, where it became a viral meme, spawning a #BirdBoxChallenge as people posted videos of themselves blindfolded in various settings. “Classical measurement has either been box office or awards. This defies all of it,” director Susan Bier told the Hollywood Reporter. “But creating a phenomenon is bound to translate into something.” 

On Thursday, Netflix will update investors on how programming such as Bird Box translates into income. Netflix’s business model is expensive — the company spent an estimated $13bn on content in 2018, regularly outbidding traditional Hollywood studios and TV networks for the most sought-after scripts and ideas.

As costs have ballooned, Netflix executives have justified it as investment that leads to subscriber and revenue growth. Thursday’s fourth-quarter results are expected to confirm that thesis: analysts predict Netflix added another 9.2m subscribers in the period, which would make 2018 the company’s best-ever year for subscription growth. 

The hype surrounding Bird Box and other holiday programming has helped sentiment for Netflix in recent weeks, as did a strong showing at the Golden Globes, where Netflix won five awards, more than any other company. The shares are up by more than 40 per cent since Christmas Eve. 

Wall Street analysts are on board. Goldman Sachs predicted that the fourth quarter “will only be the beginning of the pay-off from Netflix’s accelerating spend and increasingly robust originals slate”, adding that “consensus continues to significantly underestimate the financial impacts of these dynamics”. UBS said Netflix would “achieve a higher margin and free cash flow trajectory than currently implied by the market” as its original content “demonstrates outsize marketplace success”.

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Analysts expect Netflix’s revenue to have grown to $4.21bn for the three months ending in December, up 28 per cent from a year ago. However, Netflix has been spending big to finance the production and acquisition of films and TV series, and analysts expect the splurge to hit profits. Net income is forecast to decline to 24 cents a share in the quarter, from 41 cents a year ago,while the consensus is for operating margins to fall to 5 per cent, from 7.5 per cent a year ago. 

Shares in Netflix soared in the first half of last year, briefly making it the world’s most valuable media company. However, the rally — which has earned it a place alongside Facebook, Amazon, Apple and Google, the so-called “Faang” stocks — faltered after a surprising second-quarter miss on subscribers. 

The company recovered in the third quarter by adding almost 7m new customers, but investors and analysts will be looking for further reassurance of the company’s ability to attract and keep the attention of subscribers.

Netflix uses debt to finance its spending on content. Long-term debt stood at $8.3bn as of September 30, up from $6.5bn at the end of 2017. It spent $291.6m on interest payments for the first nine months of 2018, compared with $238m for the whole of 2017.

The company forecasts a free cash burn of $3bn for 2018 and another $3bn in 2019, but expects an improvement after that. 

But the pressure on Netflix to keep growing its multibillion-dollar content budget is only increasing as more and more rivals emerge in the video streaming market, with Disney, Apple and AT&T expected to launch fresh offerings. 

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“This reminds me of Hollywood in the 1920s and 1930s, when studios were hiring so many people to roll out content as quickly as possible, because there was so much appetite for it,” said Jeff Bock, an analyst at Exhibitor Relations. “You just wanted content, it didn’t matter what it was. That’s what it feels like Netflix is doing now.”



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