Netflix has just had the most successful financial quarter in its 20-year history, buoyed by skyrocketing subscriber figures and an increase in subscription prices in late 2017. In its earnings report for the first quarter of 2018, released after the close of markets yesterday, the company revealed that it added 7.4 million subscribers worldwide in the first three months of the year, out of which the overwhelming majority – 5 million – were from overseas markets outside the US. The company also earned $3.7 billion in total revenue in the quarter, a 40.4 percent year-on-year growth, with net income of $290 million – more profits than the company earned in the whole of 2016. MarketWatch has called the growth “stunning”, and it’s just that.
In a letter to investors before the report announcement, Netflix said, “We strive to entertain and to bring joy to people across the world through amazing stories. Our 125 million members provided us with $3.6 billion in streaming revenue in Q1. Our job is to spend this money wisely to increase our members’ delight.” Netflix executives admitted to being surprised at the scale of the platform’s success, with CFO David Wells commenting on a conference call with analysts, “We’ve outperformed the business in a way we didn’t predict...The business has grown faster than we expected.”
The platform is undoubtedly seeing the results of an aggressive expansion strategy that saw it pump large volumes of money in recent years towards international growth. The Q1 2018 report reveals that Netflix now has 125 million subscribers worldwide, out of which a little over 68 million live outside the US. Netflix’s international user base contributed 50 percent of the company’s revenue and 55 percent of its total memberships in Q1 2018, and it shows no signs of slowing down. As MarketWatch notes, if Netflix meets its second-quarter forecast of $358 million in profit, it will earn more in the first half of 2018 than all of 2017, when it reported an annual profit of $558.9 million.
Admittedly, not all is rosy for the video streaming platform. Netflix admitted in its investor letter that it is still looking at incurring $7.5-8 billion in costs for creating original content in the coming year. The platform plans to take its portfolio of original content to almost 700 titles by the end of the year, but a recent report by US firm 7Park Data has revealed that almost 80 percent of Netflix subscribers prefer to watch licensed content rather than the platform’s “originals”, especially in the US. Netflix has so far not responded to 7Park’s report, but it will be interesting to see how the company goes forward, given that it already has billions in long-term debt ($21.9 billion as of September 2017), and increasing production costs coming up.
The company is also facing increasing competition from other video streaming services, both at home and across the world. Amazon Prime Video is its biggest competitor globally, backed by the e-commerce company’s massive war chest; Netflix also increasingly has to contend with local players in many markets, like Hulu in the US, Hotstar in India, and so forth. However, the much-better-than-expected Q1 2018 results, along with robust projections for Q2, should serve to placate the company’s investors, at least for now.
Quite a few analysts and observers believe that Netflix has built too strong a market presence and lead to face any real challenges. Bryan Kraft, an equity research analyst at Deutsche Bank, told CNN, “Netflix has changed the industry in a profound way and in doing so has given itself a significant lead, making it very difficult for the traditional media companies or even other big tech companies, to catch up.” Is Netflix becoming too big to fail? The coming months will tell us more. For now, its celebration time at the largest digital media and entertainment company in the world.