Netflix Adds Record 7.05 million Net New Members

Global streaming revenue surged 41% Y-o-Y to $2.47 billion during Q4 FY16

Netflix Inc. (NASDAQ: NFLX), a US-based provider of on-demand internet streaming media, announced its Q4 FY16 and full year FY16 financial results on January 18th, 2017. Headquartered in Los Gatos, California, Netflix engages in the internet delivery of TV shows and movies on various internet-connected screens, such as TVs, digital video players, TV set-top boxes, and mobile devices.

The Company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The firm provides its members subscription-based offerings to receive TV shows and movies streaming content, including original series, documentaries, and feature films through a host of internet-connected screens. The company also provides DVDs-by-mail membership services. Read more about Netflix’s financial results below.

Q4 FY16 financial highlights

Netflix’s Q4 FY16 global streaming revenue surged 41% Y-o-Y to $2.47 billion from $2.29 billion in the year-ago same period, while contribution profit rose 74% Y-o-Y to $470 million (20% margin). During the reporting quarter, operating profit totaled $154 million (6.2% operating margin) against guidance of $125 million. Netflix’s Q4 FY16 net income jumped to $66.7 million from $51.5 million in the year ago comparable period, and compared to forecasts of $56 million. Net income during the quarter included a $22 million foreign exchange charge booked in other expense due to the strength of the US dollar. The earnings results capped a banner year that saw Netflix launch its streaming service in 190 countries a year ago. Currently, 47% of its subscribers are in countries other than the US. The solid earnings boosted Netflix’s stock 8% to an intraday high of $143.46 on Thursday, January 19th, 2017.

For the full-year FY16, Netflix’s global streaming revenue jumped 35% Y-o-Y to $8.83 billion versus $6.77 billion in the year ago corresponding period. The Company finished the year with 93.8 million members on 19.0 million net additions versus 17.4 million in 2015. Net income surged to $186.67 million from $122.64 million in the year ago same period.

Q4 FY16 segmental highlights

Domestic Streaming: During Q4 FY16, this segment’s revenues jumped to $1.40 billion from $1.30 billion in Q4 FY15. Combined with a 15% ASP growth, revenue increased 27% Y-o-Y to $1.4 billion. US contribution margin expanded 395 basis points Y-o-Y to 38.2% primarily due to higher-than-forecast revenue and the timing of content deals.

International Streaming: This segment’s revenues grew to $947.6 million in Q4 FY16 from $853.4 million in the year ago same period. ASP for the international segment rose 13% Y-o-Y (excluding a $21 million negative impact from currency). International contribution loss was $67 million, as content spend was slightly lower than expected owing primarily to timing.

Domestic DVD: During the reporting quarter, domestic DVD revenues fell to $126 million from $132.3 million in the prior year’s comparable period. Total memberships at the end of Q4 FY16 declined to 4.1 million from 4.2 million in Q4 FY15.

Subscriber growth surges to all-time high

During Q4 FY16, Netflix added a record 7.05 million net new members globally, against forecasts of 5.20 million and 5.59 million in the year ago same period. This was the biggest number of net additions in the Company’s history and was driven by strong acquisitions in both the US and International markets.

Domestically, Netflix added 1.93 million members in the reporting quarter, exceeding forecasts of 1.45 million and 1.56 million in the year ago same quarter. International membership grew by 5.12 million in Q4 FY16, against a forecast of 3.75 million and 4.04 million in Q4 FY15. This growth was broad-based geographically as Netflix’s original content continued to be well-received globally.

Netflix has been facing a slowdown in subscription growth in the US as the market matures and a planned US price hike raised concerns it would not hit its targets. On top of that, it has faced competition from live sports coverage of the Olympics and streaming services such as Amazon.com Inc. (NASDAQ: AMZN), Hulu, Sony Pictures, Sling TV, Crackle, and Mindshare.

Growth driven by original content

Netflix has successfully added more original content, and has worked to add many local-language offerings abroad, while dealing with piracy regulations, and broadband connectivity issues. The Company has been successful in finding audiences for diverse content, including subtitled and dubbed content, seeing international titles in Mexico and France take off elsewhere.

For instance, global originals like Marvel’s Luke Cage, The Crown and season 3 of Black Mirror continued to generate excellent viewing. Similarly, Gilmore Girls: A Year in the Life debuted in the top 10 in every territory. Guillermo Del Toro’s Trollhunters, launched in December 2016, is the most-watched kids original and is performing particularly well in newer territories. Netflix also released The OA, a supernatural drama. Netflix is also focusing on local content that travels pan-regionally or across multiple territories, such as Japanese anime and Turkish dramas.

Other highlights

Expansion into China: Netflix has expanded into 190 markets worldwide, except China. For now, Netflix said that it was shelving plans to launch a service in China, opting instead to license its shows to existing online service providers in China. The Company said it still hopes to launch service in China in the future.

Free cash flow deficit: In Q4 FY16, Netflix’s free cash flow deficit grew to $639 million, compared to $276 million in the year ago corresponding period, due to timing of content payments. In Q3 FY16, Netflix doubled its free cash flow deficit Y-o-Y due to higher spending on the company’s self-produced original content. Netflix said in October 2016 that its free cash flow deficit came in at $506 million compared to $252 million in the year ago same period. For FY17, Netflix said its free cash flow deficit will be about $2 billion compared to $1.7 billion in 2016.

Deal with Red Chillies: In Q4 FY16, Netflix announced a long-term deal with Red Chillies Entertainment, the film production company of Bollywood superstar Shah Rukh Khan. Netflix is now the exclusive global home for Khan’s new films; members can now enjoy access to dozens of popular Red Chillies films from the past several years.

In Q4 FY16, Netflix launched offline viewing, which allows members to download content to iOS and Android devices. Also during the quarter, Netflix launched on Comcast Corp. (NASDAQ: CMCSA) X1 set-top boxes; members who now can use their X1 remote control and user interface to access Netflix as they do their other TV networks. Netflix is also expected to monetize existing subscriptions by doing things like adopting higher pricing tiers for 4K content.

Moreover, the Netflix app will be available across Liberty Global’s footprint beginning in the Netherlands later in 2016 and the service will be expanded to other countries in 2017.

Content spending: Netflix plans to keep channeling funds to build original and licensed TV shows and movies. Content spending will be increased to $6 billion for 1,000 hours of premium original content in FY17, a $1 billion increase from FY16 when it produced 600 hours of original content. Five of the 10 shows people searched for most often last year are Netflix originals, according to the company. Also in 2017, Netflix will be the exclusive home of the new “Star Trek” series from CBS outside the US and Canada, with new episodes to be aired in 188 countries within 24 hours of their North American premiere.

Guidance

Looking forward, Netflix projects 5.2 million net adds with 1.5 million in the US and 3.7 million internationally during Q1 FY17. Netflix also expects a greater membership impact from its content slate in the second half of 2017. In Q1 FY17, Netflix is forecasting a 9% operating margin, higher than its full year target due to the timing of content spend, including moving House of Cards season 5 from Q1 FY17 to Q2 FY17. In FY17, Netflix intends to release over 1,000 hours of premium original programming. Hence, the continuing cost of developing new shows is expected to undermine plans to deliver material profits during the year.

Stock Performance

Netflix’s stock stood at $138.60, gaining 0.14%, at the close on Friday, January 20th, 2017, having vacillated between an intraday high of $140.79 and a low of $137.66 during the session. The stock’s trading volume was at 9,467,341 for the day. The Company’s market cap was at $59.40 billion as of Friday’s close.

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