Netflix (NASDAQ:NFLX) reports first-quarter earnings on Wednesday. Following an upbeat week for Netflix -- with shares jumping about 4% on Wednesday after the company said its members watched an unprecedented 10 billion hours last quarter and the stock wrapping up the week with a total gain around 9% -- the high-profile growth company's results will undoubtedly be closely watched. Here are three meaty business items to mull over to get a quick pulse check on the company.
While Netflix's U.S. streaming business is a profitable operation, the company's international segment is still running at a loss -- a big loss. In Netflix's fourth quarter of 2014, for instance, its international segment had a $79 million operating loss (revenues less cost of revenues and marketing expenses). This unprofitable segment has been an enormous drag on the company's business, playing a key role in a four-year streak of negative free cash flow for Netflix.
But Netflix's Q1 forecast for its international segment suggests that its aggressive spending in these newer markets, aimed at growing its reach and achieving greater scale, may be beginning to pay off. Expecting a record $425 million in international streaming revenue, up from $388 million in Q4, Netflix forecasts its operating loss to improve to $62 million. Could Netflix be getting to the point where its international operating loss will trend downward instead of upward, even as revenue expands?
While management readily admits that it will likely take several years for its international segment to reach profitability, this doesn't mean investors should dismiss the segment until it's in the black. When Netflix reports first-quarter results, look for positive comments from management, along with some figures to back them up, regarding the trajectory of Netflix's international segment's path toward profitability.
As Netflix reaches saturation in the U.S., it's getting difficult for the company to sustain its impressive member growth. The company expects a total of 4.05 million net member additions in Q1 (1.8 million additions in the U.S. and 2.25 million additions internationally), down from 4.33 million net additions in Q4.
For perspective, quarterly net additions have ranged between 1.69 million and 4.33 million during the last five quarters. Further, in 2014, Netflix added a record 13 million members, up from its 11.1 million member additions in 2013. By Q1, Netflix expects to have 61.4 million global members.
It's worth checking in on Netflix's ability to grow its members each quarter, but be sure to view a given quarter's growth within the bigger-picture context of the company's member growth across the last few quarters -- or even years. Volatility in Netflix' membership growth has occurred in the past and it's bound to happen in the future.
One of the most important storylines for Netflix investors to follow is the company's growing amount of original content, where it's making substantial investments.
In recent months, it's become particularly clear how seriously Netflix is taking its original content. Since the beginning of February, Netflix has launched a total of 14 original series, kids' shows, stand-up comedy specials, and one-hour specials. Consider some of these new, high-profile Netflix Original series launched since February: the third season of "House of Cards," "Unbreakable Kimmy Schmidt," "Bloodline," and "Marvel's Daredevil."
Not only has Netflix's original content proved to be successful when measured by audience, awards, and the cast Netflix is able to attract, but it's also working out economically, despite the huge up-front costs required to produce this content.
"[L]ast year our original content overall was some of our most efficient content," Netflix said in its fourth-quarter letter to shareholders. "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."
As Netflix continues to ramp up its original content, look for continued optimism from management about its economics.
For more on what to expect when Netflix reports earnings on Wednesday, including a look at analyst expectations for revenue and EPS, check out this earnings preview.