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5 Things Netflix, Inc. Management Wants You to Know

By Adam Levine-Weinberg - Jan 25, 2016 at 6:10PM

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The streaming video pioneer is focused on maintaining its high subscriber growth rate.

Netflix (NFLX -1.52%) continued its growth tear during the fourth quarter, achieving a record 5.59 million net subscriber additions. The international market has been a bright spot in terms of growth for the streaming video leader, but Netflix also continues to see steady subscriber gains in the U.S.

Not surprisingly, questions about Netflix's growth prospects and growth strategy dominated the company's earnings interview last week. Netflix executives emphasized these five points in their remarks.

Content-driven growth in the U.S.

And so the big driver [of membership sign-ups] is getting people excited about whatever title we have and then making it easy for them to join.
-- Reed Hastings 

A few years ago, Netflix was still focused on building brand awareness in the United States. Its primary marketing tool was offering free trials to convince potential customers to try the service.

Content is now the key to domestic subscriber growth. 

Today, Netflix is ubiquitous in the U.S., so building awareness is no longer the top priority. The challenge is to convince people who are aware of Netflix but don't subscribe yet to take the plunge. Netflix believes the key to success is continuously improving its content library to draw people in with shows and movies they really want to see -- and can't find anywhere else.

Adding originals without sacrificing licensed content

I mentioned a couple weeks ago we're going to launch 600 hours of new original programming this year alone. ... As a percentage of our spend, the original spending is growing, but as an absolute, the licensing dollars are continuing to grow as well.
-- Ted Sarandos

In the past few years, original content has become a key piece of Netflix's strategy to differentiate itself from competitors. Since first diving into the market with shows like House of Cards and Orange Is the New Black, Netflix has rapidly grown its original programming budget. It now produces dozens of new series each year.

By virtue of being exclusive to Netflix, original content has a unique ability to attract new members and bolster customer loyalty. However, management recognizes that subscribers still watch a lot of licensed second-run content, too. So, while Netflix will continue to put more emphasis on its originals, it also plans to keep increasing its spending on licensed content, albeit at a slower rate.

Early innings of international rollout

We have got a ways to go over the next two years. We'll keep adding more languages and make the service more relevant. ... And then beyond language, we have work to do on payments.
-- Reed Hastings

Earlier this month, Netflix CEO Reed Hastings shocked onlookers at the Consumer Electronics Show by announcing that Netflix had just gone live in 130 new countries. However, he adopted a more sober tone during the earnings interview last week. Hastings noted that turning the service on is just the first step of growing in new markets.

Language barriers are the biggest impediment to international growth. In many of its new markets, Netflix is only available in English, not the local language. This means it can only realistically target elites. To penetrate the mass market, it must add local language support.

A second issue is that in some countries, credit card usage is very low, complicating payments. Fortunately, Netflix has already confronted this issue in Latin America, and it now has much more experience in adapting its payment model to suit local customs.

Local content will unlock international potential

The first year in the U.K. was a really tough market. So it's usually successful for us now, but it's not true that it always was. ... And what we've seen in market after market like Spain, Italy, France, Germany, is this building momentum as we do more and more local content.
-- Reed Hastings

Even in markets where language support and payments aren't big issues, it's not always smooth sailing for Netflix. In many countries, even subtitled U.S. content has limited appeal.

The real game-changer is local content. To some extent, this can be licensed local-language movies or TV shows. However, Netflix has also put a lot of effort into developing original shows like "Narcos" for Latin America and "Marseille" for France. Adding more local-language original shows will help Netflix build its credibility in new markets and could attract a lot of new members.

Cash burn will continue

[W]e're on pace to use about $1 billion [of cash] and maybe a little more this year, but we upsized our debt deal last year, about a year ago. And so in terms of timing, we'd be looking at later this year, maybe early next year before we would need to do any more on the capital side.
-- David Wells

While Netflix has consistently posted small quarterly profits for the past several years, free cash flow has been negative for most of this time. Netflix's cash burn steadily increased during 2015, reaching $252 million in Q4.

Netflix expects to burn at least $1 billion in cash during 2016 due to its international losses and the high upfront cost of original content. However, after issuing $1.5 billion in debt a year ago, Netflix has an ample cash cushion of about $2.3 billion. This will allow it to wait until late 2016 or early 2017 before potentially issuing more debt.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix. Try any of our Foolish newsletter services free for 30 days. 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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