Netflix Q1 Earnings: The Stock Soars As Subscriber Numbers Impress

-17.39%
Downside
607
Market
502
Trefis
NFLX: Netflix logo
NFLX
Netflix

Netflix‘s (NASDAQ:NFLX) stock jumped by over 12% in after-hours trading following its Q1 2015 earnings announcement on April 15th. The company reported a strong set of numbers and its revenue came in at $1.57 billion, up 24% from $1.27 billion during the same quarter last year. [1] The subscriber base grew by a record 4.9 million during the quarter and the company’s global subscriber base now stands at 62.3 million. User engagement is at an all-time high and subscribers streamed 10 billion hours this quarter. [2] However, the strong dollar hurt the company’s international revenue and margins. In a letter to shareholders, the company reaffirmed its focus on original content and its commitment to improving its margins in the long term. Netflix also acknowledged the increased competition in the streaming market but stated that it will not have a material impact on the company. Let’s take a look at the key takeaways from the earnings release.

See our complete analysis for Netflix

Streaming Subscriber Numbers Shine

Relevant Articles
  1. Netflix On A Roll As It Benefits From Paid Sharing And Ads. Is The Stock Undervalued At $610?
  2. Up 50% Over Last Year, Will Q4 Earnings Drive Netflix Stock Higher?
  3. Will Netflix Stock Rally 40% To Return To Pre-Inflation Shock Highs?
  4. How Will The Password Sharing Crackdown Help Netflix Q3 Results?
  5. Will Netflix Stock Return To Pre-Inflation Shock Highs Of Over $650?
  6. The Big Password Sharing Crackdown Will Bolster Netflix’s Q2 Results

All eyes were on subscriber additions in the streaming segment and Netflix did not disappoint. The company added 4.9 million subscribers this quarter, eclipsing the 4 million it added in the first three months of 2014. [2] Domestically, Netflix added 2.3 million subscribers, which soundly beat its Q1 guidance of 1.80 million. The company’s domestic subscriber base crossed the 40 million mark and stood at 40.91 million at the end of the quarter. Netflix also delivered a stellar performance in the international segment and the subscriber base grew by a record 2.6 million customers. The number beat the previous best of 2.43 million additions set three months ago. The company expects the growth in subscribers to continue and hopes to add 2.5 million subscribers globally for Q2 2015, much higher than the 1.69 million it added during the same quarter last year.

Domestic Margins Improve But International Margins Decline

Netflix’s domestic streaming margin stood at 31.7% for the first three months of 2015, an improvement of 370 bps over the previous quarter. ((Q1 15 Letter to shareholders, Netflix Investor Relations)) The company had previously stated that it intends to improve domestic streaming margins by 200 bps/year but now believes that it can improve even further as a larger portion of global and original content costs will now be absorbed by the company’s ever growing international territories. [2] The company intends to cross the 40% threshold by 2020, a target we believe to be achievable.

Unfavorable currency movements and the additional costs undertaken due to aggressive expansion put Netflix’s international streaming margins under pressure. The international streaming contribution margin came in at -16% for the quarter and the company expects it to drop further to -22% for the next three months. [2] The company intends to complete its global expansion over the next two years and then generate material global profits. This is possible as Netflix will start experiencing operational efficiencies as it grows operations in its target countries. The marketing expenses will also come down as a percent of sales once the company establishes itself in these countries. We believe that Netflix’s international segment will start to break even by 2017 and will start having positive contribution margin from 2018 onward. It will then stabilize at current domestic levels by the end of our forecast period.

Building On Original Content Success

Netflix noted that the success of its original content has improved perception of the overall brand. The company’s original programming has garnered critical acclaim by scoring multiple Emmy, Golden Globe and Academy Award nominations and several wins in the last two years. Netflix had earlier mentioned that its original content has cost the company less money, relative to Netflix’s viewing metrics, than most of its licensed content. [3] The company will launch 320 hours of original content in 2015, including both new and returning series, films, documentaries and stand-up comedy specials. This figure is three times the amount of original programming Netflix released in 2014. As a consequence of this spending, the company’s streaming content obligations increased by $300 million during the quarter and currently stand at $9.8 billion. [2] The streaming content obligations had earlier increased by $2.2 billion during the year 2014. [1] But Netflix maintains that this increase is fairly consistent in terms of its scaling with the business and revenues. We expect these obligations to continue to grow especially as Netflix launches into additional international territories.

The Competition Is Growing

Netflix notes that the competition in the streaming video market has been intensifying. HBO has launched a stand-alone subscription service but Netflix believes that both these services cannot be considered substitutes. The company also believes that internet MVPD (multichannel video programming distributor) services such as those of Dish and Sony are a bigger threat to traditional pay-tv providers than to Netflix. Netflix also touched on piracy being one of its biggest threats. (Related – Is Piracy A Serious Threat To Netflix?)

We believe that the recent crowding of the online streaming market could potentially reduce Netflix’s pricing power. These services will be priced somewhere in between the subscription fees charged by traditional pay-tv providers and Netflix. The services will have an advantage over Netflix as they will broadcast live content whereas the same content will be made available on Netflix after it is syndicated. However, Netflix has an advantage of its own as it functions more like a repository and users can access much older content which might not be readily available on other streaming services. Additionally, Netflix has a tendency of being viewed as a complementary service rather than a competing service to various pay-TV operators. The end users could potentially form the same opinion of the company when it is compared to other streaming services in the future. Netflix has also managed to increase its attractiveness on the basis of its original content. The next few quarters will give us a better indication of how the streaming market will shape up in the future.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

Notes:
  1. Netflix’s SEC Filings [] []
  2. Q1 15 Letter to shareholders, Netflix Investor Relations [] [] [] [] []
  3. Q4 14 Letter to shareholders, Netflix Investor Relations []