Netflix’s Membership Soars As Spending On Content Creation Continues

by Trefis Team
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Netflix‘s (NASDAQ:NFLX) stock hit an all-time high on Monday as the company posted its third-quarter results, which were better than expected due to strong growth in subscribers. The company posted 30% year on year growth in revenues to $2.99 billion. The company’s international subscriber base increased at a rapid pace once again, while domestic subscriber base growth stabilized in the low double digits. Below we highlight the key takeaways:

  • Streaming revenues grew by 33% to 2.85 billion as subscriber base across both US and international streaming services.
  • U.S. Streaming revenues improved by 18.6% y-o-y to $1.55 billion. While paid memberships grew by 10% to 51.35 million (4.87 million addition y-o-y, 1 million q-o-q), total membership grew by 11% to 52.77 million (5.27 million addition y-o-y, 850,000 q-o-q). The quarter-on-quarter numbers indicate that the U.S. market is approaching maturation. Nevertheless, the contribution margins for the U.S. streaming services remain strong at 36%.
  • International streaming revenues grew by 56% y-o-y to 1.32 billion. In Q3, the total membership for international streaming services grew to 56.48 million (17 million addition y-o-y, 4.45 million q-o-q), while paid subscribers grew to 52.68 million (16 million addition y-o-y). Additionally, the contribution margins grew to 4.7%, largely due to the timing of content deals that have been pushed back to later quarters.

Based on Q3 results, we believe that Netflix’s overall subscriber base will continue to grow in the coming quarter. For Q4, the company forecasts revenues will grow by 32% to 3.27 billion. The company also expects to add 6.3 million total subscribers in Q4, which is actually fairly conservative given the pace of additions in the international streaming businesses.

See our complete analysis for Netflix

Original Content To Impact Margins And Cashflows In The Short Term

While the company initially licensed original content exclusively produced for its platform from companies such as Lionsgate and Disney, it is now developing and producing its original content. This content has been valuable for the company in terms of attracting subscribers, it does require significant upfront investments. The company plans to fund these investments largely through debt.

The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for content this year. The company will also spend close to $17 billion in content commitments over the next several years. Therefore, it expects to have negative free cash flows for the foreseeable future. However, once this original content has been produced, the content library can be monetized and amortized over a number of years, which should lead to an improvement in profitability over the long run.

See our complete analysis for Netflix

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