On the heels of a price hike for more than 58 million U.S. members, Netflix (NASDAQ: NFLX) reported its fourth quarter and full year 2018 financials last week. Among the quarter’s highlights are the streaming company’s impressive paid membership statistics. During the quarter, Netflix added 8.8 million new members, including 1.5 million U.S. members and 7.3 million internationally.

These new additions bring total paid memberships to 139.3 million (58.5 million in the U.S. and 80.8 million internationally), an increase of 29 million new (net) paid members for the year, or 33 percent, compared to 22 million new (net) paid members in 2017.

Other highlights include:

• Revenue was $4.2 billion for the quarter, an increase of 27.4 percent compared to $3.3 billion in revenue for the same period last year.
• Revenue was $16 billion for the year, an increase of 35 percent year-over-year.
• Operating income was $216 million.
• Due to the launch of many new titles in the fourth quarter, operating margin dropped from 7.5 percent to 5.2 percent year-over-year.
• Net income was $133.9 million, compared to $186 million for the same period last year.
• Diluted earnings per share dropped to $0.30, compared to $0.41 per share in Q4 2017 and $.89 in Q3 2018.
• Average paid memberships increased by 26 percent.
• Spence Neumann joined Netflix as the company’s new CFO, replacing David Wells.

Netflix addressed the new price increase of $2 per month in its January 17 shareholder letter.

“We change pricing from time to time as we continue investing in great entertainment and improving the overall Netflix experience. We want to ensure that Netflix is a good value for the money and that our entry price is affordable,” Netflix said. “We just increased our U.S. prices for new members, as we did in Q4 in Canada and Argentine, and in Japan in Q3. The new pricing in the U.S. will be phased in for existing members over Q1 and Q2, which we anticipate will lift ASP.”

Netflix provided the following guidance for the first quarter of 2019:

• Global paid net additions of 8.9 million (1.6 million from the U.S. and 7.3 million internationally), an 8 percent increase year-over-year
• Revenue of $4.5 billion, a 21.4 percent increase year-over-year
• Full-year operating margin of 13 percent, compared to 10 percent for 2018
• Diluted earnings per share of $0.56

The big draw to Netflix is the company’s vast library of original content, which Netflix invests in heavily. Netflix reported that it is seeing big success with original movies, including 80 million households viewing Bird Box in its first four weeks. Other popular, original films include Dumplin’, The Christmas Chronicles, ROMA, 22 July, Private Life and The Ballad of Buster Scruggs. 

Original series on Netflix continue to attract viewers as well, including Spanish original Elite, which has attracted viewers from 20 million households. Other new series that are gaining audiences include The Haunting of Hill House, Chilling Adventures of Sabrina and The Kominsky Method, along with new seasons of Narcos and Big Mouth.

What’s next? Netflix said it will be launch new titles in 2019, including The Umbrella Academy, Triple Frontier, The Irishman from Martin Scorsese, 6 Underground and The Politician, and seasons for popular series including The Crown, 13 Reasons Why, La Casa de Papal, Elite and Stranger Things. Netflix said it will continue to test partnerships and bundled services with other companies to grow its audience, including partnerships with Comcast and T-Mobile in the U.S. and Sky in the U.K. and Germany.

In its shareholder letter, Netflix talked about Black Mirror: Bandersnatch, an interactive movie for adults, created by Charlie Brooker, where viewers choose the plot twists for the main character. What Netflix didn’t mention is that Chooseco, LLC, the publisher of the “Choose Your Own Adventure” series, has filed a $25 million lawsuit against Netflix for violation of trademark. According to The Hollywood Reporter, Chooseco and Netflix negotiated for years on the creation of an interactive series, but never agreed on terms.

In its shareholder letter, Netflix addressed competition, stating it gets about 10 percent of TV screen time in the U.S. and less than that on mobile devices. Its penetration in other countries is lower, but still higher than what its competitors are seeing.

“There are thousands of competitors in this highly-fragmented market vying to entertain consumers and low barriers to entry for those with great experiences,” said Netflix. “Our growth is based on how good our experience is, compared to all the other screen time experiences from which consumers choose. Our focus is not on Disney+, Amazon or others, but on how we can improve our experience from our members.”

Netflix stock is down slightly since the January 17 earnings report was released. On that date, Netflix stock closed at $353.19 per share. As of 7:59 p.m. EST on January 18, Netflix stock was down $14.09 to $339.10 per share, a drop of just under 4 percent.

Insider Take:

Netflix finished 2018 on a high note, despite shareholders lack of enthusiasm. Netflix continues to report growth in terms of paid members and stellar results with its TV and movie investments, predicting a solid year ahead. Maybe investors are cautious because of the decrease in net income, earnings and operating margin, or maybe the news about the price hike or the $25 million lawsuit have them on edge.

While the latest Netflix headlines could be cause for alarm, breaking it down shows there is probably not much to be concerned about. Netflix’s past price hikes have showed no significant change in membership retention and the latest rate increase will raise the operating margin and revenue for U.S. customers, who represent close to 42 percent of total members.

As far as the lawsuit from Chooseco, LLC, even if Netflix would take it to court rather than to settle, a $25 million payout would be covered in just one week of the price hike ($2 per U.S. member x 58.5 million members = $117 million in new revenue per month. $117 million/4 weeks = $29.25 million in revenue per week). Netflix could easily sail past these two bumps in the road without a significant, long-lasting impact.