Three months ago, Netflix (NFLX 4.17%) wowed investors with expectation-shattering quarterly sales and profit growth that implied a bright future ahead for the streaming-video giant. Zooming out, the company's 2016 year saw it add 19 million new members, for a nice acceleration over the prior year's 17.4 million user gain.
On Monday, April 17, Netflix will post the first quarterly results of its 2017 fiscal year, which is likely to include that its user base shot past 100 million TV fans. Not bad for the service's first decade.
Understandably, plenty of Wall Street's attention will focus on how close the business got to management's forecast of 5.2 million user additions this quarter. But in addition to that core metric, investors will want to keep a close eye on two other important numbers from the release: profitability and cash flow.
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How much pricing power?
One of the pleasant surprises in last quarter's release was the fact that membership growth beat management's expectations, even though the company rolled a big chunk of its domestic user base into higher-priced monthly plans. The increased base prices combined with an uptick in demand for premium options, like higher-definition plans, to push average revenue per user up 15%. And yet CEO Reed Hastings and his executive team still trounced their user growth target, notching 1.93 million new members compared to the forecast of 1.45 million.
NFLX Operating Margin (TTM) data by YCharts.
Netflix has been stuck at 4% operating profitability for the past two years as it's plowed resources into global expansion. But now that the company has a foothold in nearly all the key markets around the world, executives plan to let that figure creep up to roughly 7% in 2017. There's no telling how long it might take for the figure to recapture the 13% record it set back when Netflix was mainly a DVD-slinging operation. But Hastings told investors, "We intend to grow our global operating margin for many years ahead."
The figure should jump to around 9% this quarter, but will fall back down thanks to the timing of big expenses, like the season five launch of House of Cards, which is set for the second fiscal quarter.
How much cash?
Even though profits are rising quickly, Netflix's current cash needs far outstrip what it generates from the business. In fact, the company burned through $1.7 billion last year.
That trend isn't likely to improve anytime soon. As its content portfolio shifts toward a higher percentage of original shows and movies, cash demands only increase. "Producing more owned content creates some lumpiness in our working capital needs," executives explained back in January.
NFLX Free Cash Flow (TTM) data by YCharts.
Netflix's forecast calls for its annual free cash flow to worsen this year, falling to a $2 billion loss, as management ramps up its bets on the exclusive and original content that's the main catalyst behind its membership growth. As a result, debt needs are growing. However, that's an easy trade-off choice so long as Netflix secures higher engagement from its existing users while winning plenty of new members through marketing its hit exclusive content, like The Crown and Gilmore Girls: A Year in the Life.
If Netflix announces robust membership growth this quarter, investors will have more evidence that this content strategy is delivering market-share gains. Keep profitability and cash flow in mind, too, and you'll get a more complete picture of the health of the streaming business as it enters its second decade of life.
