Netflix, Inc. NFLX reported first-quarter 2017 earnings of 40 cents per share, easily beating the Zacks Consensus Estimate of 38 cents. However, revenues of $2.637 billion missed the consensus mark of $2.641 billion.
Nonetheless, earnings grew more than six times while revenues increased nearly 35% on a year-over-year basis.
Netflix’s focus on international expansion and original content has paid off, with the streaming giant adding 4.95 million net new additions in the quarter. However, this number was a bit lower than management’s guidance of 5.20 million. The company remains confident of adding more and more subscribers as the trend of binge viewing catches up fast.
On the revenue front, International Streaming revenues (39.7% of total revenue) soared 60.5% year over year to $1.046 billion driven by an increase in paid members.
Meanwhile, Domestic Streaming revenues (55.7% of total revenue) improved 26.6% from the year-ago quarter to about $1.470 billion.
However, the DVD business continues to be in trouble with revenues (4.6% of total revenue) declining 16.8% year over year to $120.4 million.
At the end of the quarter, Netflix's had approximately 98.75 million subscribers across the globe. Paid streaming members totaled 94.36 million, up from 77.71 million in the prior-year quarter.
In the Domestic Streaming segment, Netflix’s subscriber base totaled 50.85 million, up from 46.97 million in the year-ago quarter. Paid members increased to 49.38 million from 45.71 million in the same period.
In the International Streaming segment, the company recorded 47.89 million members compared with 34.53 million in the prior-year quarter. Paid members were approximately 44.99 million, up from 31.99 million in the year-ago quarter.
Consolidated contribution profit margin (revenues minus the cost of revenues and marketing cost) was 26.9% compared with 19.4% in the year-ago quarter.
Operating income grew more than five times year over year to $256.9 million. Operating margin increased 720 basis points to 9.7%.
Netflix had $1.341 billion in cash and cash equivalents (and short-term investments) as of Mar 31, 2017, compared with $1.734 billion as of Dec 31, 2015.
Cash used in operations in the quarter was $343.9 million, compared with $228.6 million cash used in operations in the prior-year quarter. The company reported free cash outflow of $423 million.
For the second quarter of 2017, management forecasts earnings of 15 cents per share.
Domestic and international streaming revenues are expected to be $1.499 billion and $1.141 billion, respectively. Total streaming revenue is expected to be $2.640 billion while total revenue including DVD business is expected to be 2.755 billion.
Management expects to add 0.60 million subscribers in the domestic streaming segment and 2.60 million subscribers in the international segment. Domestic streaming contribution profit is expected to be $552 million. International streaming segment is expected to report a loss of $28 million. Netflix estimates the U.S. contribution margin to be around 36.8% in the quarter.
The company forecasts operating income of $120 million for the quarter.
Netflix has been drawing strength from its growing portfolio of original content. This apart, it remains focused on international expansion as it battles slowing domestic subscriber growth to solidify presence in markets like India and Korea.
Over the past one year, shares have gained 51.93%, compared with the Zacks classified Broadcasting-Radio and Television industry’s gain of 19.72%.
Recently added features like offline viewing and skip opening credits reflect Netflix’s focus on enhancing user experience, which is a positive. It also renewed deals with Adam Sandler to produce four more films for the company. Sandler’s movies, namely, “The Ridiculous 6” and “The Do-Over” were extremely successful on its platform and attracted a good number of subscribers around the world, prompting Netflix to renew the deal.
A few days back, the company hired Scott Stuber, the famous Hollywood producer and ex-Universal executive, to spearhead its movie business. Netflix plans to release 30 original films in 2017. It added that “Scott’s mandate is to increase both the portfolio and the percentage of films that delight many of our members relative to the film’s cost.”
However, investors need to watch out for astronomically high costs that come with rapid international expansion and the addition of relevant content. The company will spend $6 billion in 2017 on content and another $1 billion on marketing. These aside, stiff competition from bellwethers like Amazon.com AMZN, Hulu and Time Warner’s HBO is a concern. Also, Facebook FB and Twitter Inc. TWTR are making efforts to improve video viewing, which remains a cause of concern.
At present, Netflix carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
(We are reissuing this article to correct a mistake. The original article, issued on Apr 18, 2017, should no longer be relied upon.)
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