Netflix (NASDAQ:NFLX) wrapped up its fiscal year in dramatic fashion this week as the company blew through its membership forecast despite having raised monthly prices on most of its plans.
Let's take a look at the major trends that defined the streaming video giant's record-smashing 2017.
1. Subscriber growth
The 8.3 million users Netflix added in the quarter (verses the forecast of 6.3 million) put the company at a blistering 24 million additions for the full year.
The U.S segment added 5.3 million members to mark a solid improvement over the prior year's 4.7 million gain. That success supports management's claim that this market still has plenty of room to grow toward their goal of 60 million to 90 million subscribers, from 55 million today.
International growth continues to be the big story, though, as gains accelerated to 18 million members from 14 million in 2016 to ensure Netflix's overall expansion rate sped up for the fourth consecutive year.
2. International profits
The international segment broke into solidly positive territory for the first time in 2017, less than two years after the company established its initial presence in over 130 new markets.
These new territories are now free to march toward the impressive profitability that Netflix enjoys in the U.S. In fact, CEO Reed Hastings and his team are forecasting that international margin will climb to 13% next quarter from 9%. That will mark a small but important step toward the current 38% U.S. profitability rate.
Streaming content obligations climbed by over $3 billion during the year and are now sitting just below $18 billion. Rather than looking at these commitments as a liability, Netflix sees them as a huge competitive asset.
After all, they represent a mix of owned and licensed content that the company has secured for purposes of entertaining its users over the next few years. In other words, content obligations are the company's most powerful tool for enhancing customer satisfaction and generating the buzz that drives more membership gains. You can also look at the content portfolio as a competitive moat, since only the largest entertainment giants could ever hope to match its scale -- and that possibility is getting dimmer with each passing year.
Operating margin nearly doubled to 7% last year. That happy result was a consequence of surging membership gains and rising prices.
Netflix had been telling shareholders that profitably would expand steadily from that 7% mark and now we have a better idea of what that growth will look like. Hastings is predicting operating margin will rise by 3 full percentage points in 2018 to cross into double digits for the first time since the company started its pivot toward streaming video.
5. Cash flow
Netflix (only) burned through $2 billion of cash in 2017, which was slightly less than executives had forecast. However, investors should brace for huge annual cash outflows for the foreseeable future -- including as much as $4 billion in 2018 alone.
All the data that management has (e.g., viewing hours, cancellation rates, and sign-up trends) tells them that their cash-consuming original content strategy is working, mainly by attracting new users and boosting the value of a Netflix membership for existing subscribers.
It's only natural that the company would funnel resources as aggressively as possible toward its main membership driver. And thanks to the recent booming sales and profit results, investors can be more confident that Netflix's hefty content investments will pay off in future quarters as the cash spending is converted into a valuable streaming property.