How Much Can Netflix’s Australian Operations Contribute Towards Company’s International Revenues

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Netflix (NASDAQ:NFLX) recently experienced a significant jump in its stock price and the Australian Communications and Media Authority (ACMA) report detailing the company’s strong growth in Australia was partly responsible for this jump. Netflix has done extremely well, acquiring 2.5 million subscribers in the country during the first six months of 2015. We believe that the company will continue to gain subscribers in Australia over the next few years. According to our current projections, Netflix will have more than 7 million paying Australian subscribers by the end of 2022. Additionally, we estimate that total revenues from Netflix’s Australian operations will amount to around $800 million by that time, forming 10% of Netflix’s total international revenues. If Netflix manages to achieve a contribution margin of 25% in the country within the next six to seven years, the gross profit derived from Australian operations would amount to a little over $200 million, accounting for 8.5% of Netflix’s total international gross profit.

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The ACMA recently reported that streaming giant Netflix (NASDAQ:NFLX) acquired 2.5 million subscribers in the country during the first six months of 2015. [1] It’s noteworthy that Netflix’s streaming service was launched in Australia in March, which means that the company acquired all these customers during a four-month period, which is all the more impressive. Netflix’s impressive performance in Australia can also be gauged by the fact that even though the company entered the country fairly recently, ACMA has claimed that “Netflix accounts for the majority of Subscription Video On Demand (SVOD) services used in Australia.” ACMA surveyed 1,505 Australian adults in May and June and concluded that around 17 percent of the country watched video content via SVOD services during the January-June period. Among these, 78 percent claimed to have used Netflix during the six-month period while 88 percent stated that they used the service in the previous seven days.

Our Estimates Regarding Netflix’s Australian Operations

According to our current projections, Netflix will have more than 7 million paying Australian subscribers by the end of 2022. We believe that the Average Revenue Per User (ARPU) derived from Australian subscribers by the end of 2022 will be close to our international ARPU estimation of $9.36 per month. Resultantly, we estimate that total revenues from Netflix’s Australian operations will amount to around $800 million, forming 10% of Netflix’s total international revenues. Netflix aims to increase its international contribution margin levels significantly after 2017, and we believe that the company can reach 30% by the end of our forecast period. However, as Netflix has entered Australia fairly recently, we believe that the country’s contribution margin levels will be lower that our overall international contribution margin figure. If Netflix manages to achieve a contribution margin of 25% in Australia within the next six to seven years, gross profit derived from the Australian operations would amount to a little over $200 million, i.e., around 8.5% of Netflix’s total international gross profit.

Why We Believe Netflix Will Perform Well in Australia

Australia has over 12 million broadband subscribers which means that Netflix already has a penetration of around 20% in the country. [2] Netflix’s penetration in mature markets such as the U.S. is closer to 45% and growing, which means that it has ample room to grow in a newer market like Australia. A caveat to the 2.5 million subscriber figure is that the ACMA has not given any information on how many of these subscribers are paying subscribers. We believe that a major section of these subscribers could be in an initial trial period as the company employs this strategy to penetrate newer markets. However, Netflix in the past has been able to retain a major percentage of its initial trial period subscribers in the previous markets it has operated in. Additionally, the company has always managed to convert a large percentage of its initial subscribers into paying customers as evidenced by the fact that over 92% of Netflix’s current total international subscribers are paid subscribers. [3] All these factors lead us to believe that Netflix will be able to retain a large part its trial customers in Australia and will also continue to add new subscribers in the coming years.

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Notes:
  1. Netflix Australia Reaches Estimated 2.5 Million Users, November 17, 2015, The Hollywood Reporter []
  2. 8153.0 – Internet Activity, Australia, June 2015, June 10, 2015, Australia Bureau of Statistics []
  3. Netflix’s SEC Filings []