Netflix Inc. (
reported a blockbuster fiscal fourth-quarter 2013. The streaming
service provider reported earnings of 79 cents per share that
surpassed the Zacks Consensus Estimate by 14 cents. Shares surged
16.6% ($55.27) in after-hours trading.
Revenues of $1.18 billion were also ahead of the Zacks Consensus
Estimate of $1.17 billion in the quarter. Most significantly, the
company added 2.33 million domestic subscribers, much better than
management's guidance of 2.01 million.
In the last quarter, the international streaming business segment
added 1.74 million subscribers, well ahead of management's
guidance of 1.31 million.
Revenues jumped 25.6% from the year-ago quarter, primarily driven
by higher international revenues (19.0% of revenues), which
surged 118.4% year over year to $221.4 million in the reported
Domestic revenues (63.0% of revenues) increased 25.6% from the
year-ago quarter to $740.6 million. However, DVD revenues plunged
16.2% year over year to $213.3 million.
Revenues climbed 6.3% from the previous quarter, based on a 5.6%
increase in domestic revenues and a 21.0% jump in international
revenues, which fully offset a 3.9% decline in DVD revenues.
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 11.07 million paid streaming subscribers over the last 12
months. On a sequential basis, Netflix added 3.42 million paid
subscribers in the third quarter.
Total streaming subscriber base increased 11.08 million year over
year to 44.35 million. Sequentially, total subscriber growth was
This strong subscriber addition was primarily driven by Netflix's
expanding content portfolio that includes original productions
The Short Game
. Netflix also launched the animated series
in collaboration with
DreamWorks Animation (
In the fourth quarter, the company signed a partnership deal with
Marvel Entertainment. The deal will bring at least four new
13-episode series and a mini-series based on characters such as
Daredevil, Jessica Jones, Iron Fist and Luke Cage on Netflix
Netflix announced that it is reviving
, produced by Fox. The detective program was cancelled by
AMC Networks (
after its second season. The company will stream original
in Jan 2014, new seasons of
House of Cards
Orange is the New Black
as well as
, an original adult animated series.
Netflix recently announced that will stream the drama series
in late 2014. The company will also stream original shows such as
(early 2015) and
over the next couple of years.
During the quarter, Netflix upgraded its interface to make it
more user-friendly. The new operating interface is expected to
make it easier for users to browse content of their choice, as it
displays more information about the recommended movies and
The company also launched streaming application into Virgin
Media's set-top box for U.K. members and also into Denmark's
Waoo! (went live in fourth quarter) and most recently at Com Hem
These new roll outs drove the international subscriber growth.
Netflix launched a couple of new marketing campaigns in Brazil
and Canada, which are expected to boost subscriber growth, going
Consolidated contribution profit margin (revenues minus cost of
revenues and marketing costs) improved 490 basis points (bps)
from the year-ago quarter and 130 bps on a sequential basis to
The strong year-over-year growth in contribution profit was
primarily driven by 53.1% surge in domestic contribution profit,
which fully offset a 13.6% decline in DVD contribution profit and
$57.3 million loss in international streaming segment.
The sequential increase was primarily due to 3.3% growth in the
DVD segment and 4.3% increase in the domestic business. Despite
heightened marketing activities international streaming segment
reported much lower loss.
Marketing expense as a percentage of revenues declined 40 bps
from the year-ago quarter and 110 bps from the previous quarter.
Similarly, technology & development expense as a percentage
of revenues decreased 40 bps year over year and 30 bps on a
General & administrative expense as a percentage of revenues
increased 20 bps from the year-ago quarter but declined 30 bps
from the previous quarter.
As a result of improving cost structure and higher revenue base,
operating income jumped to $82.3 million from $19.6 million in
the year-ago quarter. Operating income also surged 44.1% quarter
over quarter to $82.3 million.
Net income was $48.4 million or 79 cents (better than
management's guided range of $29.0 million/47 cents to $45.0
million/73 cents) compared with $7.9 million or 13 cents in the
year-ago quarter and $31.8 million or 52 cents in the previous
At the end of the fourth quarter, Netflix had $1.20 billion in
cash and cash equivalents (including short-term investments)
compared with $1.13 billion in the previous quarter. Long-term
debt stood at $500.0 million at the end of the quarter.
Netflix generated $41.4 million in cash flow from operations
compared with $34.7 million at the end of the previous quarter.
The company reported free cash flow of $5.2 million in the
For the first quarter, management forecasts earnings of 78 cents
and net income of $48.0 million. The earnings guidance is in line
with the current Zacks Consensus Estimate and is much higher than
31 cents per share reported in the year-ago first quarter.
Domestic and international streaming revenues are expected to be
$796.0 million and $267.0 million, respectively. Management
expects to add 2.25 million subscribers in the domestic streaming
segment and 1.60 million subscribers in the international segment
in the first quarter of 2014. Netflix expects total subscribers
of 48 million at the end of first quarter.
Domestic streaming contribution profit is expected to be $198.0
million. International streaming loss is expected to be $42.0
Netflix intends to step up its spending on original content and
also plans to launch in new international markets in 2014. The
company expects to incur an additional $400.0 million long-term
debt in the first quarter.
Netflix reported an impressive fourth 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 Amazon Prime, HBO,
Hulu, Youtube, iTunes Video and BBC iPlayer.
Netflix will also face competition from Verizon and Sony who are
gearing up to enter the streaming business. Moreover, Verizon's
legal win over Federal Communications Commission (FCC) in the net
neutrality legal case is a concern for Netflix in the long run.
Additionally, Netflix's continuous subscriber loss in its DVD
business and higher spending on content acquisition are
headwinds. Nevertheless, the company's growing subscriber base
will continue to be a major growth factor in the near term.
Further, the company's partnerships with cable television
providers Virgin Media (in the U.K.) and Com Hem (in Sweden) will
boost international subscriber base, going forward.
Currently, Netflix sports a Zacks Rank #2 (Buy).
AMC NETWORKS- A (AMCX): Free Stock Analysis
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