Netflix Shares Surge On Q4 Results

Hits Its Mark Even As Domestic Sub Growth Shows Sign Of Slowing
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Netflix continued to expand its subscriber base worldwide in the fourth quarter of 2014, even if the rate of growth in the U.S. showed signs of slowing.

Shares in Netflix surged $45.20 (12.96%) to $394 each in after-hours trading Tuesday as it beat Wall Street earnings and subscriber forecasts.

Netflix signed on 4.33 million net adds in the period (versus a projected 4 million), extending its global membership to 57.39 million. Of that, Netflix added 2.43 million subs outside the U.S., expanding its international sub base to 18.28 million. Netflix added 1.9 million U.S. streaming subs in the period, down from 2.33 million in the year-ago quarter.

For all of 2014, Netflix added a record 13 million new members, up from 11.1 million in 2013, the company said in its quarterly letter to shareholders.

Netflix posted fourth quarter net income of $83 million ($1.35 per share) on total revenues of $1.3 billion, up from $962 million in the year-ago period. Netflix’s international business posted a fourth quarter loss of $79 million on revenues of $388 million. In Q1, Netflix expects its international business to post a loss of $62 million on revenues of $425 million.

The company expects to add 4.05 million subs (2.25 million internationally) in the first quarter of 2015, which would extend its subscriber total past 61.44 million (20.53 million from outside the U.S.).

Netflix said additional research showed that price increases are not the main culprit for slower growth in the U.S., believing the decline would have occurred independent of that as growth in net adds has been the strongest in lower income areas of the U.S.

“We think, instead, the reduction in y/y net additions is a natural progression in our large US market as we grow,” the company told shareholders. “We have built in flexibility to our business model in terms of how quickly we grow content and marketing spend, so we intend to keep US contribution margins growing even with lower membership growth.”

In 2015, Netflix plans to increase U.S. contribution margins from 30% in Q1 to about 32% in Q1 2016 to about 34% in Q1 2017. The company is hopeful that it can achieve 40% contribution margins by early 2020.

Overall, the company remains bullish, as it is “increasingly clear that virtually all entertainment video will be Internet video in the future….We believe there is big growth ahead in the US market for Netflix, even if we may not get there in a straight line of 6 million annual net adds. We’ll continue to improve our content, our marketing and our service, to eventually achieve ‘must have’ status in most households.”

The company expects to launch in Australia and New Zealand in late Q1, and believes it can complete its global expansion over the next two years (from about 50 today to 200) while remaining profitable. Netflix is still “exploring options” for China, labeling them as “modest.”

On the company's earnings call/interview, Netflix CEO Reed Hastings expanded on that, noting that Netflix must obtain a license to offer service in China, but "it’s not 100% clear we’re going to be able to do that." 

On the content front, Netflix said it will launch 320 hours of original series (new and returning) this year, roughly triple the amount of original fare it released in 2014.

Netflix also said it has made progress with set-top integrations, citing recent rollouts with British Telecom and TalkTalk on the YouView set-top in the United Kingdom; Deutsche Telecom in Germany; Bouygues, SFR, and Orange STBs in France; Proximus in Belgium, and select Dish Network boxes in the U.S.

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