The pressure was on as Netflix (NFLX -9.09%) tried to bounce back from sloppy third quarter, and it did exactly that after the market close on Tuesday.
The premium video streaming service came through with a strong growth and better-than-expected subscriber growth. Revenue soared 26% to $1.485 billion, just ahead of Wall Street forecasts. Closing out the year with 13 million more subscribers than it had a year earlier helps, of course, and a springtime pricing increase finds new members paying more to enjoy Netflix's expanding digital smorgasbord.
The 72% surge in net income -- to $83.4 million, or $1.39 a share -- is a facade. The Netflix model does lend itself to scalability, where profitability can grow faster than revenue, but that's not happening here. Netflix is investing in content and international expansion, and that's going to hold back net income in the near term. The reason for the pop this time around was a hefty one-time tax benefit. Back that out, and adjusted earnings dipped slightly to $0.72 a share. That's short of the $0.79 it delivered a year earlier, but it's considerably better than the $0.45 the pros were targeting.
However, the real reason Netflix shot higher in after-hours trading Tuesday night is that Netflix's global popularity continues to increase at an encouraging clip. The stock took a hit in October, when Netflix fell short of its own subscriber forecast for the end of the third quarter. It came through this time by exceeding its guidance calling for 4 million net additions to its worldwide streaming platform. Most of that growth came from Netflix's booming international markets.
Let's all go to the lobby
There were a couple of other tasty morsels in Netflix's report, but the most stunning admission was that its original content was more efficient than the rest of its catalog last year.
"Our originals cost us less money, relative to our viewing metrics, than most of our licensed content, much of which is well known and created by the top studios," reads Netflix's letter.
It's not a surprise that Netflix is generating a lot of traffic to its proprietary content. It's the only place that one can stream many of these shows. However, saying that original content generates a better return in terms of viewing relative to cost than other shows and movies is a pretty big deal. It validates the push that Netflix has been making to generate exclusive content, and it's preparing to spend even more in the future.
This won't get in the way of a healthy performance. Netflix expects to add more than 4 million net new streaming subscribers worldwide during the current quarter. It sees the contribution margin on its domestic operations topping 30% for the first time. Losses continue internationally -- and investors will want to keep an eye on free cash flow after back-to-back quarters of negative results -- but there's ultimately more good than there is bad in the report.
