Netflix Inc. Reports Confident Overseas Subscriber Growth

Source: Netflix.

On Tuesday night, Netflix (NFLX -0.62%) reported results for the fourth quarter and full fiscal year of 2015. The digital-video veteran saw strong subscriber growth overseas, and Netflix shares rose more than 7% in after-hours trading. The stock has now gained 137% over the past 52 weeks.

Netflix results: The raw numbers

Source: Netflix.

What happened with Netflix this quarter?

• Guidance for the fourth quarter had pointed to 1.65 million net new domestic subscribers and 3.5 million additional overseas accounts. Overall, the company collected 5.6 million new users globally, well above the 5.15 million guidance target.
• These results include contributions from recent market openings in Japan and Mediterranean Europe. However, the 130 new markets that were introduced during the Consumer Electronics Show in early January did not affect fourth-quarter subscriber trends.
• The company served an addressable market of 360 million broadband homes by the end of 2015. The January expansion added another 190 million potential broadband-connected customers -- a 53% larger reach overnight.

Management has not offered full-year forecasts since 2010, focusing on guidance for the coming quarter instead.

• In the first quarter of fiscal year 2016, Netflix expects to add 1.75 million net new domestic subscribers, down from 2.28 million in the equivalent 2015 period.
• International net additions are seen landing near 4.35 million, up from 2.60 million in the year-ago quarter.
• Subscribers who were grandfathered into lower monthly fees over the past couple of years will start paying the higher rates during the first quarter. Lifted by this effect, plus an expanding user base with 4K TV sets that can make use of Netflix Ultra HD content, total contribution margins are expected to rise from 16.2% to 16.7%.
• Netflix is putting its back into marketing and content acquisition for its 130 new territories. The additional operating costs will weigh on the bottom line, where earnings are expected to fall from $0.05 to $0.03 per share.

What management had to say
Many critics of the Netflix business model like to ask for viewership numbers per Netflix original, which would make the streaming service more easily comparable to traditional TV networks. Management tends to dodge these requests, but it took some time out of the earnings report to explain the rationale behind the lack of hard numbers:

We don't release title-€level ratings, as our business model is not dependent on advertising or affiliate fees. Instead, we release "ratings" for Netflix as a whole every quarter with our membership growth report (75 million and counting!). It is member viewing and satisfaction that propels our growth.

In other words, Netflix CEO Reed Hastings and his team prefer to think about viewership data from a very high-level perspective, in terms of how the content choices affect subscriber numbers overall.

Following up on that angle, the same skeptics often point out that Netflix is spending a lot on original content -- maybe even too much. Content chief Ted Sarandos tackled that concern in the earnings call. 21st Century Fox (FOX) (FOXA) executive John Landgraf recently complained about Netflix outspending him, and Sarandos took that bull by the horns:

The only reason why we can have shock-and-awe spending on a series is because we get shock-and-awe viewing on that series.

Overspending is relative. If a show like The Get Down or The Crown, which are relatively expensive shows, are successful, it's money well spent the way it was for House of Cards and Orange Is the New Black.

Looking ahead
With the global coverage project nearly completed, Netflix must now focus on making the most of its larger footprint. The goal is still to deliver breakeven bottom-line results for the full fiscal year and then shift into margin expansion and cash generation in 2017 and beyond.

China remains elusive, and Netflix has not yet decided whether it should partner with a local video business or go it alone there. Either way, Hastings didn't want to commit to entering China in 2016, but conceded that it might take "many years of discussions, or it could happen faster than that."

Hastings also pointed out that it took Apple (AAPL -0.81%) six years to bring the iPhone into China, but that the long slog turned out to be worthwhile because China is now a strong growth market for that company. In the most recently reported quarter, Apple doubled its Chinese sales year over year to $12.5 billion. The late entry still left a lot of room for the iPhone to make a mint in China, and Hastings is setting Netflix up to follow a similar path.