Netflix Inc. (
surged 11.3% ($40.00) to $394.99 in after-hours trading on the
heels of impressive third quarter 2013 results. Netflix's
earnings of 52 cents per share comfortably beat the Zacks
Consensus Estimate by 4 cents.
Revenues of $1.11 billion were also slightly ahead of the Zacks
Consensus Estimate of $1.10 billion in the quarter. Most
significantly, the company added 1.28 billion domestic
subscribers, much better than management's guidance of 1.09.
In the last quarter, international streaming business segment
added 1.44 billion subscribers, well ahead of management's
guidance of 0.90 billion.
Revenues jumped 22.2% from the year-ago quarter, primarily driven
by higher international revenues (17.0% of revenues), which
surged 135.5% year over year to $183.1 million in the reported
Domestic revenues (63.0% of revenues) increased 26.1% from the
year-ago quarter to $701.1 million. However, DVD revenues plunged
18.2% year over year to $221.9 million.
Revenues climbed a modest 3.4% from the previous quarter, based
on a 4.5% increase in domestic revenues and a 10.3% jump in
international revenues, which fully offset a 4.5% decline in DVD
Robust subscriber additions in Netflix's streaming business (both
domestic and international) led to the year-over-year and
sequential improvement in the top line. Notably, the company
added 10.52 million paid streaming subscribers over the last 12
months. On a sequential basis, Netflix added 2.38 million paid
subscribers in the third quarter.
Total streaming subscriber base increased 10.87 million year over
year to 40.28 million. Sequentially, total subscriber growth was
This strong subscriber addition was primarily driven by Netflix's
expanding content portfolio that includes original productions
such as Orange is the New Black, as well as the complete seasons
of popular shows from other production houses such as AMC.
Notably, Netflix's original show House of Cards won a Primetime
Emmy Award, as the first fully web-based show. Altogether, the
company won three Emmy awards during the quarter.
In the third quarter, Netflix signed a number of partnership
agreements with the likes of The Weinstein Company, PBS and
DreamWorks Animation (
that will help the company venture into different genres like
comedy, kid shows, political thrillers, autobiographies and
International subscriber growth was helped by Netflix's launch in
the Nordic countries as well the Netherlands. The company also
gained from steady growth in its existing markets.
Consolidated contribution profit margin (revenues minus cost of
revenues plus marketing costs) improved 320 basis points (bps)
from the year-ago quarter to 18.0%. However, contribution profit
declined 10 bps on a sequential basis.
The strong year-over-year growth in contribution profit was
primarily driven by 74.0% surge in domestic contribution profit,
which fully offset an 18.4% decline in DVD contribution profit
and a loss of $74.3 million loss in international streaming
The sequential decline was primarily due to higher loss in the
international streaming segment. The segment's results were
negatively impacted by higher marketing expenses related to
Netflix's launch in the Netherlands and marketing campaigns in
the Nordic countries and Brazil.
Marketing expense as percentage of revenues declined 150 bps from
the year-ago quarter and 90 bps from the previous quarter.
Similarly, technology & development expense as a percentage
of revenues decreased 50 bps year over year and 10 bps on a
However, general & administrative expense as a percentage of
revenues increased 30 bps from the year-ago quarter and 10 bps
from the previous quarter.
Operating income was $57.1 million compared with $16.1 million in
the year-ago quarter. The year-over-year surge was primarily
driven by higher revenue base and lower expenses. However,
operating income remained flat on a sequential basis.
Net income was $31.8 million or 52 cents (better than the
management's guidance of $26.0 million or 43 cents) compared with
$7.7 million or 13 cents in the year-ago quarter and $29.5
million or 49 cents in the previous quarter.
At the end of the third quarter, Netflix had $1.13 billion in
cash and cash equivalents (including short-term investments)
compared with $1.08 billion in the previous quarter. Long-term
debt stood at $500.0 million at the end of the quarter.
Netflix generated $34.7 million in cash flow from operations
compared with $33.9 million at the end of the previous quarter.
The company reported free cash flow of $7.0 million in the
For the fourth quarter, management forecasts earnings between 47
cents and 73 cents. Net income is expected in the range of $29.0
million to $45.0 million.
Domestic and international streaming revenues are expected in the
range of $731.0 million - $741.0 million and $210.0 million -
$224.0 million, respectively.
Management expects total subscribers in the domestic and
international streaming markets in the band of 32.7 million to
33.5 million and 10.1 million to 10.9 million, respectively.
Domestic streaming contribution profit is expected to be in the
range of $165 million to $177.0 million. International streaming
loss is expected to be in the range of $73.0 million to $57.00
million. DVD contribution profit is expected to be in the range
of $96.0 million to $100.0 million.
Netflix intends to step up its spending on original content and
also plans to launch in new international markets in 2014.
Netflix reported an impressive third quarter and also provided an
optimistic guidance. We believe that the expanding content
portfolio and launch in new international markets will help it to
counteract stiff competition from the likes of
Although, Netflix's continuous subscriber loss in its DVD
business and higher spending on content acquisition are concerns,
the company's growing subscriber base will continue to be a major
growth factor in the near term.
Moreover, the company recently entered into partnerships with
cable television providers Virgin Media (in UK) and Com Hem (in
Sweden) to provide its service through set-top boxes from
. It is also looking for cable partners in the domestic market,
which we believe will further boost subscriber base, going
Currently, Netflix has a Zacks Rank #1(Strong Buy).
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