In America’s booming internet industry it’s all about users, users, users (James Dean writes). This mantra guides Wall Street’s assessment of Netflix, the world’s largest video streaming company, whenever it publishes its latest tally of subscribers. Profit, revenue, cash-burn and other supposedly worthy metrics are deemed much less interesting.
So when Netflix smashed its third-quarter subscriber growth target on Tuesday night, its shares leaped by 14 per cent. Netflix brought in seven million extra subscribers, a couple of million more than it had forecast in July. Its estimate for fourth-quarter subscriber growth, of 9.4 million, was a million ahead of Wall Street’s estimates. All of this came against the backdrop of a missed second-quarter subscriber growth forecast, a dip in its share price and worries that its customer base was nearing saturation.
Netflix was founded in 1997 in California as a DVD service, but its move into video streaming in 2007 helped to revolutionise the entertainment industry. Its growth since then has been driven by the critical and commercial success of exclusive shows such as House of Cards and Making a Murderer.
International subscriptions are now fuelling Netflix’s growth. They climbed by 5.9 million to 73.5 million in the third quarter, picking up the pace from growth of 4.5 million in the second quarter. There also appears to be some gas left in the tank in the United States — subscriber growth picked up from 670,000 in the second quarter to 1.1 million in the third. International streaming revenue surpassed US revenue for the first time — $2 billion, up by 49 per cent, compared with $1.9 billion, up 25 per cent.
Netflix is succeeding with the balancing act of driving subscriptions higher to pay for exclusive shows that keep old customers loyal and new ones coming through the door. At the same time, it is eking out more profit per subscriber.
Using its end-of-quarter subscriber numbers as a base, roughly speaking, revenue per user in the third quarter was $28.52 and cost per user, including marketing, was $20.50, giving a profit per user of $8.02. That was better than a profit of $7.97 per user in the second quarter and $5.64 in the third quarter last year. Third-quarter profit, of $403 million, comfortably beat Wall Street’s expectations and revenue was in line at $4 billion.
Investments in original content — Netflix has a production budget of $8 billion this year — pushed cash-burn up to $859 million from $465 million in the same quarter a year ago. However, to this extent, there was good news in the guidance: Netflix said that cash-burn next year would be roughly in line with this year, at $3 billion, somewhat less than the $4 billion it had forecast previously. In other words, profit, revenue and cash-burn — the less interesting stuff — were positives in the third quarter, too.
It was a rosy report, but the landscape will change next year when Disney, Apple and AT&T launch their own streaming services.
Netflix’s sensitivity to subscriber growth forecasts means that it isn’t a stock to hold for the short term. It trades at about nine times estimated 2019 revenue compared with an average of six times for large-cap internet stocks. It hasn’t yet paid a dividend and probably won’t do so soon. However, the company has first-mover advantage in an industry that has a long way to grow and a content budget that is the envy of its rivals. It will take time for Disney et al to catch up with their new streaming services. In the meantime, Netflix will continue to suck up customers all over the world.
ADVICE Buy
WHY Netflix has allayed concerns that subscriber growth is slowing and is pulling even further ahead of its rivals
Pearson
The self-styled “world’s learning company” has some revision of its own to do (Miles Costello writes). While Pearson, the academic publisher, has been going great guns with its online degrees, professional training and tools for teaching English as a foreign language, life in the more traditional North American classroom has been a tougher proposition.
Yesterday’s trading statement covering the nine months to the end of September, though, shows a group that has knuckled down well with its required extra homework and has been winning higher marks from its shareholders.
Pearson was founded as a construction group in 1844, later moving into newsapers and, during the 1950s, into publishing. It employs more than 30,000 staff across 70 countries and in its most recent financial year made pre-tax profits of £421 million on sales of more than £4.5 billion.
Its developed markets are Britain, the United States, Australia and Italy and, while online programs, virtual schools and English language tools account for about 70 per cent of the group, 30 per cent is in US higher education course content, both digital and print.
Online course registrations globally were up a healthy 13 per cent over the nine months, volumes of its English tests jumped by 34 per cent and revenues in its online academies and virtual schools were also up well.
A 3 per cent drop in revenues in US higher education courseware was within Pearson’s anticipated range of a 2 per cent to 5 per cent decline, as overall sales fell. Pearson was taken by surprise in America by a sharp increase in the number of students renting rather than buying textbooks, exacerbated by the entry into the market of Amazon. It has responded by cutting prices and getting into the rental market via distribution deals with booksellers.
This publisher remains the proverbial work in progress as it chases its first underlying growth in annual profit in six years, but clearly it is doing all the right things. The shares, up 18p at 835½p yesterday, have risen by 47.5 per cent from their trough just over a year ago. They are worth owning.
ADVICE Hold
WHY Recovery is on track and sustained growth should come
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