Posted by on June 17, 2017 1:50 am
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Categories: Adam Business Cable television Cable TV Comcast Dish Network Economy Economy of the United States Entertainment GAAP netflix Pay TV satellite TV Software Technology television Video on demand

Despite going all-in on Adam Sandler content – a bizarre choice – Netflix has managed to continue growing its subscriber base, recently reaching a new milestone: It now has more paying customers than Comcast Corp., Charter Communications and all other US cable companies combined.

As Forbes reports, Netflix now has 50.85 million subscribers, surpassing cable’s 48.61 million. There is one caveat, though: Cable’s total doesn’t include minor cable networks, which could amount to 5% of total customers.

Over the past five years, Netflix has managed to more than double its subscriber base from 23.4 million in the first quarter of 2012. But growth has slowed recently due to intensifying competition from a host of rival streaming services, causing Netflix to miss both its domestic and foreign subscriber targets for the first quarter.

Here’s a summary of Netflix’s Q1 results:

1Q revenue $2.64b vs est. $2.65b

1Q GAAP EPS 40c vs 37c

1Q domestic streaming net adds 1.42 million, vs consensus est. 1.59MM vs company forecast 1.5MM

1Q international streaming net adds 3.53MM consensus est. 3.90m vs company forecast 3.7MM

2Q GAAP EPS forecast 15c vs est. 23c

2Q revenue forecast 2.755BN  vs est. $2.76BN

Luckily for American cable companies, the battle for subscribers isn’t a zero-sum game. Here’s Forbes:

While cable subs are down by 4 million in the same five years that Netflix has seen huge growth, that’s not a massive drop off. It’s also worth bearing in mind that cable TV makes up only 50% of total TV viewership in pay TV. That said, Q1 2017 shows a net loss in subscriptions while Q1 2016 saw cable grow a little.

Satellite TV is doing okay, with around 38 million subscribers. Dish Network added 318,000 customers in Q1 with Direct TV stalling with gains that didn’t outpace customer loses. Satellite is still growing faster than cable though.

Faster still though are the internet-delivered services like Sling TV and Direct TV now which have added 350,000 in Q1. These services now have 1.7 million customers between them, and it’s likely that this segment will continue to see growth as customers move away from cable TV.

Cable, satellite and internet streaming services in the US have a combined 93.3 million subscribers. Even as Netflix expands into more foreign markets, it likely won’t match that total any time.

To be sure, the Netflix to cable comparison isn’t really fair to the cable companies: While the exact cost depends on the specific package, monthly fees associated with cable are typically many times more expensive than Netflix’s $10 fee.

Which brings us to our next, and final topic: Slowing subscriber growth isn’t the only metric that makes Netflix’s critics uncomfortable. The company’s unprecedented cash burn is another major red flag. In Q1, the company burned $422 million, which while less than the record $640 million burned in Q4 (over $1 billion in the last 6 months) was $160 million than its cash burn from a year ago. The company still expects to burn a total of $2 billion for the full year.

Here’s how the company explains it:

Free cash flow in Q1’17 was -$423 million vs. -$261 million in the year ago quarter and an improvement from -$639 million in Q4’16. The growth in our original content means we continue to plan to have around $2B in negative FCF this year.

We have a large market opportunity ahead of us and we’re optimizing long-term FCF by growing our original content aggressively. Negative near-term FCF is the result of the big increases in our original content, combined with small but growing operating margins. Since we want our operating margins to grow slowly so we can spend enough to quickly grow revenue and original content, we anticipate negative FCF to accompany our rapid growth for many years.

Our operating margins are our key indicator of improving global profitability; they are already growing and we plan to keep them growing for many years ahead. Eventually, at a much larger revenue base, original content and revenue growth will be slower, and we anticipate substantial positive FCF, like our media peers.

It remains to be seen if the transition from massive cash burn to cash flow positive is as simple as the company expects it to be.

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