'The Witcher' boosts Netflix profits, but rivals slow growth

Jan. 21, 2020 5:39 PM PT

Powered by the popularity of “The Witcher” and “The Crown,” Netflix profits and global growth surged in the fourth quarter, even as the company faced fresh challenges from rival services operated by Walt Disney Co. and Apple.

Netflix said it added 8.8 million subscribers in the fourth quarter of 2019, bringing its global total to 167.1 million, which was well above forecasts.

Fourth-quarter revenue grew 31% to $5.47 billion over the same period last year, while net income rose to $587 million, up from $133.9 million a year ago and easily topping analyst projections of $240.3 million, according to FactSet.

However, the strong results were tempered by signs of a continued slowdown in the U.S. Netflix added 423,000 customers in the quarter, far below the 600,000 it had projected, bringing its U.S. customer total to 61 million.

Moreover, Netflix telegraphed that it would add fewer subscribers — 7 million — in the first quarter of 2020 than Wall Street was expecting. The Los Gatos company cited the effect of competition and price increases.

Last year Netflix upped the price of its subscription plans in the U.S., which led to a notable subscriber drop in the second quarter. Its most popular plan, a standard subscription, went up $2, to $12.99 a month. The basic monthly subscription rose $1, to $8.99.

“As always, we are working hard to improve our service to combat these factors and push net adds higher over time,” Netflix said in a letter to shareholders.

The results highlighted concerns among some analysts about the increasing competition Netflix faces from new and coming rival services.

“The real dilemma for the company lies ahead,” said Haris Anwar, an analyst at financial markets platform Investing.com. “Customers will have more choices in streaming services this year. The biggest challenge for Netflix in this dynamic situation is how to maintain a fine balance between growth and spending.”

This is the first quarter during which Netflix has been competing against new streaming offerings from Disney and Apple, with further competition expected from the upcoming launches of AT&T’s HBO Max and Comcast Corp.’s Peacock, which will be in homes by the summer.

Some of its competitors are offering lower-priced services. Disney+ starts at $6.99 a month, while Apple TV+, which launched with nine original programs, costs $4.99 a month. Some versions of Peacock, which this summer will carry the Olympics, will be free, while HBO Max will cost $14.99.

About 1 million Netflix subscribers switched over to Disney following the Nov. 12 Disney+ launch, according to survey results by brokerage Cowen & Co.

But in a presentation to analysts on Tuesday Netflix Chief Executive Reed Hastings downplayed the threat from Disney+, saying it would more likely draw viewers from traditional TV networks.

Netflix has outspent most of its rivals. The company has said it planned to invest $15 billion on content in 2019. That amount will grow to $35 billion by 2025, according to Pivotal Research Group.

The company’s rising clout was evidenced by its 24 Oscar nominations, the most of any studio, led by “The Irishman” and “Marriage Story.”

For the year, Netflix reported net income of $1.87 billion, up 54.1% from 2018. During the same period, sales rose 27% to $20.2 billion.

“Netflix ended 2019 on a strong note with new subscriber additions above expectations,” said EMarketer forecasting analyst Eric Haggstrom in a statement. Netflix’s investments in original content “are paying off. “ But “Netflix will need to continue to produce hit shows as Disney, Apple, HBO and others launch and scale new services,” Haggstrom added.

Netflix said in its letter to shareholders on its website Tuesday that it would continue to prosper. “Despite the big debut of Disney+ and the launch of Apple TV+, our viewing per membership grew both globally and in the U.S. on a year over year basis, consistent with recent quarters,” the company said.

The period included huge film releases for Netflix, among them “The Irishman” from director Martin Scorsese, “Marriage Story” and “The Two Popes.” Eddie Murphy returned to movies in the critically acclaimed “Dolemite Is My Name.”

Netflix said more than 21 million member households watched the new season of “The Crown,” up 40% from the second season over the same time period. “The Witcher,” which stars Henry Cavill, is on track to be Netflix’s biggest first season ever for a TV series. Through its first four weeks of release, 76 million households watched the fantasy series, Netflix said.

The company raised eyebrows when it announced a new method for measuring views. Previously, a view was counted as a subscriber who watched at least 70% of a single episode or film. Now, Netflix is counting a view as someone who watches just two minutes or more of an episode or film.

Some analysts were skeptical of the new methodology. “Netflix shifting from 70% completion of a movie to ‘watched at least 2 minutes’ to determine watch counts is literally absurd,” Rich Greenfield, a media and technology analyst at LightShed Partners, tweeted.

Netflix has been investing heavily overseas as its domestic market growth slowed, creating local-language content in markets in South America and Europe.

“More competition is coming in 2020, but we see opportunity for subscriber upside,” Bank of America analyst Nat Schindler wrote in a research note ahead of the earnings release.

Shares closed Tuesday at $338.11, down 0.46%. Shares rose more than 2% in after-hours trading.