The 5 Numbers Behind Netflix's Bounce

Netflix (NASDAQ: NFLX  ) seems to be back in Wall Street's good graces. The company reported earnings on Wednesday that soundly beat the Street's estimates, sending the stock soaring. Here's a look at some of the key numbers that powered the fourth-quarter beat.

2 million: Netflix added more than 2 million subscribers in the quarter, as consumers snapped up content-ready Internet devices like tablets and smart TVs over the holiday shopping season.

The company ended the year with 25.47 million paid domestic subscribers. That easily beat its guidance from last quarter. But it also means that Netflix only added about 5.5 million subscribers in the U.S. in 2012, short of its earlier 7-million-member target.

18.5%: The streaming service is getting more profitable. Contribution margin from the U.S. business climbed by more than two full percentage points in the fourth quarter, to 18.5%. That's double the rise than the company was expecting. The profit contribution from streaming has been climbing for more than a year, and the company expects the trend to continue:


Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Contribution Margin

10.9%

13.2%

15.6%

16.4%

18.5%

Source: Netflix financial filings.

The different profit profiles between the streaming and DVD businesses has been a point of some debate for investors. Since DVD customers pay more per month, the focus on streaming led to worries that Netflix was sacrificing profitability while leaving its cash cow behind. But that's not the way the company sees it. Here's how CEO Reed Hastings explained the trade-off in last year's fourth-quarter conference call, when he was asked why Netflix would trade a profitable DVD subscriber for a seemingly less profitable streamer:

[A] marginal streaming subscriber is almost pure contribution margin. ... A marginal DVD subscriber has a number of variable costs -- the postage and DVD fees, in particular. So, actually it is the opposite, which is the profitability of a new streaming subscriber, the contribution margin is almost twice what it is for a DVD subscriber.

1.7 million: Netflix expects to add nearly 2 million more members in the current quarter. That would be impressive given the high penetration that the service boasts in the U.S. already. But as more exclusive content comes online, that should add a tailwind to subscriber growth. This quarter will see the debut of Netflix's exclusive original series House of Cards. And next quarter the fourth season of the cult hit Arrested Development is on tap. Management sees the company putting a heavier emphasis on original content over time, leading it to look more like HBO eventually, and less like a content distributor.

0: That's the number of new markets that the company plans to enter over the next six months. After aggressively spending on several global launches, Netflix is putting its international expansion plans on ice. For over a year the streamer has been in a cycle of climbing to profitability only to spend the proceeds on an expensive international launch. While that's helped it get a jump-start on competition in markets like Latin America, it has been brutal to the bottom line. Netflix is taking a breather from that whipsaw for now, choosing instead to marshal its resources as it considers the next expansion in late 2013 or early 2014.

113: That's the number of Netflix's top 200 movies and TV shows that its competition doesn't carry. Amazon.com's (NASDAQ: AMZN  ) Prime streaming service has the most overlap, with about 73 of Netflix's top 200. Next up is Hulu, the joint venture by Disney (NYSE: DIS  ) , News Corp. (NASDAQ: FOXA  ) , and Comcast (NASDAQ: CMCSA  ) , with just 27 of those titles. And finally, there's the brand-new Redbox Instant service from Coinstar (NASDAQ: OUTR  ) and Verizon, which only offers 12 of Netflix's biggest hits. While competition is heating up, Netflix has a huge lead over its rivals in terms of titles that are actually being watched. That gives the company a healthy buffer as the content race moves into more original and exclusive titles.

Still, the number that most long-term shareholders won't easily forget is $300, which was the high that shares reached in July 2011. Netflix's latest update on its business doesn't mean it will retest that figure anytime soon. But if it can keep up this pace of subscriber and profit growth in the U.S, while cautiously expanding overseas, then there's every reason to expect this week's bounce to hold up.

More on Netflix from The Motley Fool
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