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Netflix, Inc. Earnings: International Growth Accelerates

By Adam Levine-Weinberg – Jan 19, 2016 at 6:00PM

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Profitability remains modest, but Netflix is catching on outside the U.S.

Internet TV leader Netflix (NFLX -2.04%) released its much-anticipated fourth quarter results on Tuesday afternoon. The company reported strong subscriber growth again in Q4, particularly in international markets.

Netflix's popularity continues to rise. Photo: The Motley Fool

Netflix's rapid growth outside the U.S. isn't profitable yet, and probably won't be for another year or two. However, the slower-growing domestic business is becoming increasingly lucrative, funding the international subscriber gains that are expected to drive future profit growth.

Netflix's quarter by the numbers
Netflix's revenue reached $1.82 billion last quarter, up 23% year over year. That came in just short of the average analyst estimate of $1.83 billion. On the other hand, Netflix's earnings per share of $0.10 easily beat the average analyst estimate of $0.02. However, much of that difference came from the company's negative effective tax rate last quarter.

Here's how Netflix's Q4 performance stacked up with management's own guidance from October across a variety of other key metrics.


October Forecast

Q4 Actual

Global Streaming Revenue

$1.67 billion

$1.67 billion

Operating Income

$49 million

$60 million

Domestic Subscriber Adds

1.65 million

1.56 million

Domestic Contribution Profit

$374 million

$379 million

International Subscriber Adds

3.50 million

4.04 million

International Contribution Profit

($117 million)

($109 million)

Source: Netflix Q3 and Q4 subscriber letters 

Across virtually all of these key metrics, Netflix performed as well as it had projected in October -- or better. The only area where it fell short was in domestic subscriber growth. Even there, paid subscriber growth was slightly ahead of management's forecast, which enabled Netflix to beat its domestic contribution profit target.

Slowing domestic growth vs. rapid international expansion
One area of concern for analysts recently has been saturation of the U.S. market. For example, analyst Will Power cut his rating on Netflix stock to neutral earlier this month, based in large part on concerns that Netflix's domestic growth is tapering off.

Indeed, Netflix didn't add quite as many new subscribers in the U.S. as it had hoped for in Q4. That said, the shortfall relative to management's guidance was fairly modest. Moreover, for the full year, Netflix added 5.62 million domestic subscribers, compared to 5.69 million domestic subscribers in 2014. So far, growth has not slowed very much.

By contrast, international growth continues to accelerate, driven by the addition of new markets and the improvement of Netflix's service in existing markets. The 4.04 million international subscribers Netflix added last quarter was a quarterly record. A year earlier, the international subscriber count increased by just 2.43 million in Q4.

For the full year, Netflix added 11.75 million international subscribers, barely surpassing 30 million by December 31. That was up 60% from 7.35 million international subscriber additions in 2014.

Looking ahead
In Q1, Netflix expects domestic subscriber growth to slow again but domestic profit should continue to rise rapidly because of higher average pricing and more efficient content spending. Meanwhile, it expects another quarter of record international subscriber additions, thanks to its recent expansion to 130 more countries.

The declining DVD business is holding back EPS growth. Photo: The Motley Fool

Despite the rise in domestic streaming contribution profit, EPS is expected to decline on a sequential and year-over-year basis to $0.03. The latest international expansion may drive losses slightly higher abroad, while overhead expenses will rise and the domestic DVD-by-mail business continues to decline.

Longer-term, Netflix still expects profitability to improve dramatically beginning in 2017. For that to happen, it needs to continue adding international subscribers at a rapid pace, in order to add enough revenue to bring that part of the business to profitability.

On the domestic side, the key will be sustaining solid growth after long-term subscribers lose their "grandfathered" $7.99 price for the HD streaming plan this spring. Fortunately, Netflix has built up a lot of customer loyalty in the last few years, so most subscribers will likely fork over an extra $2 per month -- driving further domestic revenue and profit growth.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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