When Netflix, Inc. (NFLX -0.94%) reported its fourth-quarter and full-year 2017 financial results, all eyes were on subscriber growth -- and investors were not disappointed. Netflix increased its ranks by 8.33 million new net subscribers, far surpassing both analyst consensus estimates of 6.23 million and the 6.30 million Netflix itself forecast just the quarter before. The recent price hike likely caused the company to be conservative in its guidance, but increasing its subscriber base to over 117 million worldwide was impressive none the less.
Netflix's revenue of $3.286 billion jumped 32.6% year over year, edging out analysts' consensus estimates of $3.28 billion and Netflix's forecast of $3.274 billion. Net income jumped to $186 million, up 178% over the prior-year quarter, passing Netflix's guidance for $183 million. Earnings per share topped out at $0.41, soaring 173% year over year and matching Netflix forecast and analysts' expectations.
While all of these metrics were widely reported, there were a few things in the company's release that you may have missed.
Contribution margin is a non-GAAP measure that Netflix believes "is an important measure of our operating segment performance as it represents each segment's performance before global corporate costs."
Over the last year, domestic contribution margin has slipped from 38.2% in the prior-year quarter to 34.4% for the just-completed quarter. This is likely the result of the additional marketing expenditures Netflix has made to increase its U.S. customer base. The international contribution margin has made a complete turnaround, increasing to 8.7% from a negative 7% in the prior-year quarter. This shows that the economics of Netflix producing its own content are paying off. The company has said that its original shows have a lower cost per subscriber than the content it licenses from elsewhere.
In its shareholder letter, Netflix said, "We ... achieved for the first time a full-year positive international contribution profit."
Increasing key expenses
In its shareholder letter, Netflix revealed that it would increase the marketing it does around key titles like 13 Reasons Why, Stranger Things, and Bright. Netflix said it would increase its advertising budget for the coming year to $2 billion, a jump of 56% over 2017. Over the long term, the company believes it will drive membership growth.
Netflix is also planning to grow its investment in technology and development to $1.3 billion in 2018, an increase of 23% over last year.
Ever-growing content spend
Netflix said it burned through $2 billion in free cash flow for 2017. While that was at the lower end of the range of $2 billion to $2.5 billion the company expected, this was largely related to the timing of content payments, which will now come due in 2018. Netflix says its negative free cash flow will grow substantially, and it expects to consume between $3 billion and $4 billion this year.
The company believes its track record of subscriber growth tells the tale, and that continuing to invest heavily in original programming is still the right move. To that end, Netflix plans to increase its content spending to between $7.5 billion and $8.0 billion in 2018. Investors should note that Netflix CEO Reed Hastings indicated that "it will definitely, of course, be higher in 2019 and 2020."
Beyond the headlines
There is much more going on at Netflix than what investors read in the headlines. While keeping abreast of the growing subscriber base and increasing revenue, it is also important to look beyond the headlines to see what makes up those numbers and what is contributing to the company's skyrocketing subscriber growth.