Netflix reaches 125m subs with revenue surge for Q1

Netflix added a record number of first quarter subscribers and grew its streaming revenues by 43% year-on-year in what was another sterling three-month period for the online video giant.

Netflix said it added 7.41 million members in the first quarter – 1.96 million in the US and 5.46 million internationally. This was up 50% compared to Q1 2017 and was ahead of the company’s own 6.35 million forecast.

Nearly three quarters of its new subscribers came from outside its home market in the US and analysts now expect its overseas sales to overtake those in its US home market for the first time in the next three months.

This arrives at a time when Netflix is making a big investment in local productions, which content chief Ted Sarandos focused on in particular during the company’s earnings call last night. He says that titles such as Brazil’s 3% have been particularly successful and the streamer is looking to add more, such as Denmark’s The Rain.

“We’ve been able to launch original series in local language with local producers all over the world who’ve shot in 17 different countries original programming to date, and we expect that to continue to grow,” he said.

Meanwhile, revenues grew faster than at any time since Netflix launched its streaming business, which it attributed to a 25% increase in average paid streaming memberships and a 14% increase in average selling price.

Total revenue from its streaming business totalled US$3.60 billion for the quarter with the US accounting for US$1.82 billion and international US$1.78 billion. In its forecast for the current quarter Netflix said it expects this balance to tip in favour of international streaming, with international revenue of US$1.94 billion to outstrip US revenue of US$1.94 billion.

Netflix had 125 million global members in Q1, 55% of whom were outside the US. It said it expects to add another 6.2 million subscribers globally this quarter to push its user count to 131.2 million.

On the content front the SVOD giant said that it will spend US$7.5-US$8 billion on content on a profit and loss basis in 2018 across a wide variety of formats – specifically series, films, unscripted, docs, comedy specials and non-English language content.

Netflix’s operating margin was 12% in Q1 and is expected to be 10%-11% for the full year, with content and marketing spend to be weighted towards the second half of 2018.

“We continue to forecast free cash flow of -$3 to -$4 billion in 2018, and to be free cash flow negative for several more years as our original content spend rapidly grows,” the company said in its letter to shareholders.

Asked on the company’s earnings call about the potential of M&A activity, chief content officer Ted Sarrandos said that mergers and acquisitions could be a “very useful tool” for acquiring IP – for instance Netflix’s 2017 acquisition of comic book publisher Millarworld.

Vice-president of finance and investor relations, Spencer Wang, said that in general Netflix has a “strong bias to build over buy”. However, he added: “We continue to be on the lookout for new IP or other related assets that can help improve the service and help us grow faster.”

When questioned about Netflix’s biggest future challenge, CEO Reed Hastings said: “We’re a fraction of the hours of viewing of YouTube. We’re a fraction of the hours of viewing of linear TV. We’ve got some great momentum, and we’re very excited about that, but we have a long way to go in terms of earning all of the viewing that we want to.”

Netflix’s latest earnings announcement sent the company’s share price up by more than 7% in pre-market trading.