Netflix (NFLX) is trading sharply higher today after it reported Q4 results last night. GAAP EPS came in at $0.41, which was in-line with prior guidance of approximately $0.41. Revenue rose 32.6% year/year to $3.29 bln, which was slightly better than prior guidance of $3.27 bln. The guidance for Q1 was quite good as NFLX expects EPS of $0.63 and revenue of $3.686 bln, both of which are above market expectations, especially EPS which was well above.
Net subscriber additions (streaming) in Q4 came in at +8.33 mln (+1.98 mln in US and +6.36 mln international), which was well above prior guidance of +6.30 mln and well above its prior year performance of +7.05 mln. In terms of guidance for net adds (streaming), the company expects Q1 to come in around +6.35 mln (+1.45 mln in US and +4.90 mln international). As you can see, most of NFLX's subscriber growth is coming from outside the US.
So why were Q4 net adds so much better than prior guidance? In fact, they were the highest quarter in NFLX's history. The upside to guidance was primarily due to stronger than expected acquisition fueled by its original content slate and the ongoing global adoption of internet entertainment. Geographically, the outperformance vs. guidance was broad-based.
In terms of content for Q4, Netflix says it capped an amazing year for original content with returning seasons of The Crown and Black Mirror as well as Stranger Things. In Q4, NFLX also successfully launched new titles like the limited series Godless, Marvel's The Punisher and Mindhunter, the latter two of which are renewed for a second season. NFLX says it's amazing to think that in only 5 years since launching its first original series, Netflix had three of the Top 5 most searched TV shows globally for the second year in a row.
NFLX's largest investment in original films to date, Bright, a fantasy action movie starring Will Smith, was a major success and drove a notable lift in acquisition. In its first month, Bright has become one of our most viewed original titles ever. The company is planning a sequel as well as additional investment in original films. NFLX also debuted Dark, its first German original drama series. In addition to being well-received in its home country, Dark has also been viewed by millions of members in the US and has outsized watching throughout Europe and Latin America.
In terms of competition, NFLX says it has talked a lot about the transition from linear to streaming for the past 10 years. As this trend becomes increasingly evident, more companies are entering the market for premium video content. On the commercial-free tech side, Amazon Studios is likely to bring in a strong new leader given their large content budgets, and Apple is growing its programming, which NFLX presumes will either be bundled with Apple Music or with iOS.
Facebook and YouTube are expanding and competing in free ad-supported video content. With their multi-billion global audiences, free ad-supported internet video is a big force in the market for entertainment time, as well as a great advertising vehicle for Netflix. Traditional media companies are also expanding into streaming.
Disney is in the process of acquiring most of 21st Century Fox and plans to launch a direct-to-consumer service in 2019 with a beloved brand and great franchises. The market for entertainment time is vast and can support many successful services. In addition, entertainment services are often complementary given their unique content offerings. NFLX believes this is largely why both NFLX and Hulu have been able to succeed and grow.
In sum, this was a real good way to end the year for Netflix. While the Q4 revenue and EPS was just in-line, the net subscriber adds of +8.33 mln seems to be most responsible for the move in the stock today. Also, the 1Q18 net suscriber add guidance of +6.35 mln was quite good and should be a nice YoY improvement from +4.95 mln in 1Q17.
Overall, investors seem to be quite pleased with NFLX's Q4 results. Today's move is especi ally impressive consideirng that the stock had run nearly $40 since late December heading into this report so expectations were quite high. And the stock is up another $25 this morning.