Source: Netflix
The big news out of Netflix's (NFLX -3.92%) fourth quarter earnings release was simple: Internet TV is a global phenomenon.
The streaming video giant added six million members during the quarter, with two-thirds of them coming from outside the U.S. CEO Reed Hastings forecasted another six million gain in the current quarter, combining for 12 million additions in just six months. That's almost as much growth as the company managed through all of 2014.
In addition to the global growth story, here are three important trends for Netflix investors to watch over the coming year.
Priming the content hose
The company plans to release 600 hours of original programming in 2016, up from 450 last year. It should set a new record for its launch pace in the next few months, according to executives. "Just in a single quarter, we're releasing more programming than most networks will in their whole year," content chief Ted Sarandos told investors during the quarterly conference call.
That bulging content pipeline is the biggest factor behind its plans to spend $7 billion in 2016. Original programming is getting the most funding, because it provides the biggest payoff in terms of engagement and branding, according to Sarandos, "The positives that come from original spending have been tremendous in terms of our international growth, in terms of really distinguishing and differentiating Netflix from an explosion of [competing] services."
To keep widening that competitive moat, Netflix says it will be prioritizing family-friendly entertainment like the upcoming Fuller House series and new seasons of Unbreakable Kimmy Schmidt and Stranger Things.
Steady pricing gains
Netflix's profitability spiked in the U.S. market as contribution margin climbed to 34% from 28% in the prior year period. A big factor behind that increase was higher prices: Customers paid 4% more per month on average last quarter thanks to higher monthly fees and more users opting for upgraded plans like the Ultra-HD option. The upgrade trend should continue as more people buy UHD-capable TV sets.
Source: Netflix
Prices will also get a boost as big segments of the subscriber base see their monthly bills tick higher by $2 starting in the second quarter. The good news for investors is that the rising price trend takes away some of the sting from slowing growth in the maturing U.S. market. Netflix forecasts adding just 1.75 million domestic users next quarter, down from 2.28 million in the prior year period. "The next 50 million are a little harder than the first 50 million in terms of growth," CFO David Wells said.
More debt is on the way
Surging content spending, coupled with losses from international markets, is projected to send Netflix's free cash flow plunging toward a negative $1 billion annual pace this year. The growing original programming bets play a much bigger role in that trend, since those shows require cash upfront, whereas licensed content is easier on the cash flow statement.
Yet the company could be in a strong enough financial position to withstand its peak year of projected international losses -- without taking on more debt. Netflix has for the past three years dipped into the bond market, taking out $500 million, $400 million, and then $1.5 billion of debt in the first quarters of 2015, 2014, and 2013, respectively. Hastings and his team still expect to start posting substantial global profits beginning in 2017, but management thinks it's likely that they'll need at least one more debt infusion, either in late 2016 or early next year.
