Investors are used to seeing head-turning growth numbers from Netflix (NASDAQ:NFLX). After all, the streaming-video leader is sitting at the front of the massive global shift toward on-demand, internet-delivered entertainment that's disrupting the entrenched broadcast TV ecosystem.
Its ability to hold that valuable leadership position over the past several years has produced phenomenal growth for shareholders. But the company still has a knack for surprising Wall Street with its business trajectory. This past quarter was no exception.
Let's take a look at a few of the standout numbers from Netflix's latest quarterly report.
Netflix predicted back in January that its first quarter would establish a record for subscriber growth. Yet the company blew past its own guidance to land 9.6 million new members compared to the 8.9 million projection. It was a 16% acceleration over the gains in the prior-year period.
That's about the same global additions the company managed in all of fiscal 2012, the first full year after its streaming service became a stand-alone offering apart from its DVD mailings. While it's still early, the Q1 increase suggests Netflix has a good shot at achieving a sixth consecutive year of accelerating gains as subscriber growth surpasses the 29 million it notched in 2018. The company now counts about 150 million paying users around the world.
The company earned $459 million in operating income, which translates into a 10% operating margin. Investors are expecting significant gains here as the margin rises to 13% of sales for the full year compared to 10% last year, 7% in 2017, and about 4% in 2016.
By raising or lower content spending, CEO Reed Hastings and his team can shift the trend of margin expansion in any given period. They've landed on a 3-percentage-point per year increase as an approximate goal, though, which they think strikes the right balance between targeting growth and strengthening Netflix's finances. The next few quarters will mark another test of that balance as users in the U.S. react to its latest significant price increase.
Cash outflow projection
While the profit outlook is brightening, Netflix's cash trends are headed in the opposite direction. Executives now see cash outflow reaching as much as $3.5 billion compared to $3 billion last year and $2 billion in 2017.
Most of the cash drain reflects good news in that Netflix is spending more aggressively on original content that management believes will drive higher engagement and more membership gains when it launches in the next few years. Its recent Our Planet documentary is a good example of that process at work. Netflix had to spend cash on the ambitious program four years ago and it is now the company's most successful documentary launch to date.
CFO Spencer Neumann stands by his prediction that the business will turn the corner on cash outflow in 2019, with trends improving each following year. The bets Netflix is making today are big, he admits, but don't stretch the company too far. "I spent a lot of time as the new CFO," Neumann told investors in a recent conference call, "focused on our liquidity ... and feel very comfortable with this approach to our capital structure."
Netflix is moving toward the ability to fund its business needs internally, but for now it still needs to rely on high-yield credit markets. Yet management is eager to end that risky situation and stop taking loans from bondholders. "I think the message to debt investors," Hastings said, "is you better get in soon because there's not going to be that much more to go." Now it's up to the streaming specialist to demonstrate that it can start funding its business internally over the next few years.