Netflix (NFLX -3.92%) shocked Wall Street a year ago when it announced that it had added 2 million more subscribers than expected during the seasonally strong fourth quarter. A winning slate of exclusive content ensured another year of accelerating membership gains for the streaming video giant while its international markets, as a group, reached profitability for the first time.
Investors seem to be betting on history repeating itself this week. Netflix stock is near all-time highs, and shares have trounced the market in the months leading up to its fiscal fourth-quarter report on Monday, Jan 22.
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Global growth
Netflix is predicting a modest slowdown in both its U.S. and international segments. The domestic market should add 1.25 million members compared to 1.93 million a year ago. The international division should pitch in the biggest growth contribution, meanwhile, at 5.05 million new users compared to 5.12 million last year. Overall, CEO Reed Hastings and his team forecast adding 6.3 million subscribers to push its global base to 109 million in the fourth quarter.
Those results would be good news for the business for two main reasons. First, they'd confirm healthy membership growth despite the rising prices that are the foundation for Netflix's shift toward higher-quality content. Second, these membership gains would mean the company just concluded its fourth straight year of accelerating growth, having added roughly 22 million new users compared to 19 million in 2016.
Annual subscriber gains in millions. 2017 includes management's Q4 forecast. Chart by author. Data source: Netflix filings.
International contribution
Losses from Netflix's international markets appear to have peaked and are now giving way toward significant profits that should grow well into the future. In fact, executives are calling for the segment to deliver over $100 million of positive contribution margin in the fourth quarter compared to similarly sized losses as recently as early 2016.
Chart by author. Q4 represents management's forecast. Data source: Netflix filings.
That dramatic improvement has been a key reason why Netflix could roughly double profitability in the past year. The now profitable global markets should also help net income jump to $183 million in the fourth quarter, translating into $0.41 per share of profit, up from $67 million, or $0.15 per share, a year ago.
Long-term outlook
Netflix typically releases management's best guess at membership growth for the following quarter as part of each earnings report. That outlook might look aggressive this week, but mainly because it will be going up against a relatively easy prior-year period that saw subscriber gains slow dramatically. Netflix added just 4.95 million users in 2017's first quarter, compared to 6.74 million the year before, as it lapped its major international expansion push and moved the release date for House of Cards into the fiscal second quarter. Netflix's new forecast should call for faster gains that reflect its stepped-up expansion pace.
Hastings will likely issue a few longer-term targets on Monday, too. Updated annual content spending plans should push the category well over $6 billion, with perhaps as much as one-third of that cash going toward the production of original and exclusive shows and movies. Netflix will need to issue a new profit margin forecast as well since its official outlook only calls for operating margin to "steadily increase" from the 7% rate the company achieved in 2017.
Investors might be hoping for the annual cash flow metric to improve from the $2 billion outflow we've seen in the past two years. But that's not likely as long as Netflix continues to pursue its original content strategy that has supercharged its expansion pace since management started it in 2013.
