Netflix Rides Subscription Growth To Solid Q1

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Netflix (NASDAQ:NFLX) announced solid first quarter results, as both its revenue and earnings per share came in ahead of market expectations.The company’s revenues grew a robust 40% year-over-year (y-o-y) to $3.7 billion. This was driven by strong growth in subscribers across both the U.S. and international streaming markets. The international subscriber base increased at a rapid pace (42% y-o-y) once again, while domestic subscriber base growth stabilized in the low double digits.

We have a $304 price estimate for Netflix, which is slightly below the current market price. Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key takeaways from Netflix’s Q1.

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Streaming Business Remains Strong

Streaming revenues grew 44% to $3.6 billion as the company’s subscriber base – across both U.S. and international streaming services – grew at a faster rate than expected. U.S. Streaming revenues increased by 24% y-o-y to $1.82 billion. While paid memberships grew by 12% to 55 million (5.7 million addition y-o-y, 2.2 million sequentially), total membership grew by 11% to 56.7 million (5.8 million addition y-o-y, 2 million sequentially). The net U.S. subscriber additions were more than expected, indicating that cord-cutting measures in the country remain strong. However, the contribution margins for the U.S. streaming business declined to 38.3% from 41.2%.

International streaming revenues grew 70% y-o-y to 1.8 billion. In Q1, the total membership for international streaming services grew to 68.3 million (20.3 million addition y-o-y, 5.5 million sequentially), while paid subscribers grew to 63.8 million (18.8 million addition y-o-y, 6 million sequentially). Additionally, the contribution margins grew to 15% from 4%, largely due to the timing of content deals that have been pushed back to later quarters. Netflix’s subscriber base is likely to see further strong growth in 2018 driven by similar trends.

Future Outlook

Netflix expects 6.2 million global net additions (1.2 million in the U.S. and 5 million for the international segment) as compared to 5.2 million in the year-ago quarter, which is actually fairly conservative given the pace of additions in the international streaming businesses. In addition, the company also expects its operating margin to be around 12% in Q2.

Netflix saw its stock gain nearly 50% in 2017, and is already up more than 50% year-to-date as of April 17. The company should continue to benefit from its strong foothold in the streaming business as well as a robust lineup of TV shows and films in 2018. The company has a long-term goal of ensuring that nearly 50% of the content streamed on its platform is original. As a result, it is spending a significant portion of its content budget on original shows. The company plans to spend as much as $8 billion on shows and movies in 2018, up from $6 billion earmarked for content in 2017, which should drive subscriber growth but will weigh on margins.

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