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Netflix (NFLX) Q3 Earnings In Line, Revenues Miss Estimates

Netflix, Inc 's NFLX third-quarter 2015 earnings of 7 cents per share came in line with the Zacks Consensus Estimate but revenues of $1,738.4 million missed the estimate of $1,743 million.

Lower-than-expected domestic subscriber growth and increasing costs for new content weighed on the results. Netflix recorded 0.88 million new members domestically compared with 0.98 million in the prior year quarter. The numbers were also short of the company's guidance of 1.15 million. Management partly held responsible the ongoing transition to chip based credit and debit cards that caused delay in processing payments from subscribers for the disappointing domestic subscriber growth. Shares were trading down 3% in the aftermarket session

Quarter Details - Revenues

The company's revenues rose 23.3% year over year to $1.74 billion driven by higher revenues from both International and Domestic Streaming.

International revenues (29.7% of revenues) soared nearly 49.5% year over year to $516.9 million driven by robust growth in paid members.

Domestic revenues (61.2% of revenues) improved 21.3% from the year-ago quarter to $1.06 billion.

However, DVD revenues (9.1% of revenues) witnessed a 15.6% year-over-year decline to $157.5 million.

Subscriber Base

In the Domestic segment, Netflix's subscriber base totaled 43.18 million, up from 37.22 million in the year-ago quarter. Paid members increased to 42.07 million from 36.27 million in the year-ago quarter.

In the International Streaming segment, the company recorded 25.99 million members compared with 15.84 million in the prior year quarter. It recorded 2.74 million net new members in the quarter, compared with 2.04 million a year ago. Paid members were 23.95 million, up from 14.39 million at the end of the year-ago quarter.

In the quarter, Netflix recorded 3.62 million new members compared with 3.02 million in the prior year quarter. In total, Netflix now has over 69 million subscribers across the globe. Paid members totaled 66.02 million, up from 50.65 million in the year-ago quarter.

Margins

Consolidated contribution profit margin (revenues minus the cost of revenues and marketing cost) was 20.5% compared with 22% in the year-ago quarter.

Operating income plummeted 33.3% year over year to $73.6 million. Operating margin declined 360 basis points to 4.2%.

GAAP net income was $59.3 million compared with $23.7 million in the year-ago quarter.

Balance Sheet

Netflix had $2.1 billion in cash and cash equivalents as of Sep 30, 2015 compared with $1.1 billion as of Dec 31, 2014. Including short-term investments, the company's total cash was approximately $2.6 billion in the quarter.

Cash used in operations in the quarter was $196 million compared with $37.4 million cash used in operations in the prior-year quarter. The company reported non-GAAP free cash outflow of $252 million.

Netflix's total streaming content obligations increased to $10.4 billion from $8.9 billion in the year-ago quarter.

Outlook

For the fourth quarter of 2015, management forecasts earnings of 2 cents and net income of $10 million. Domestic and international streaming revenues are expected to be $1,101 million and $566 million, respectively. Total streaming revenues are expected to be $1,667 million.

Management expects to add 1.65 million subscribers in the domestic streaming segment and 3.5 million subscribers in the international segment. Domestic streaming contribution profit is expected to be $374 million. International streaming loss is expected to be $117 million due to higher marketing spend. Netflix forecasts operating income of $49 million for the quarter.

Netflix estimates U.S. contribution margin to be around 34% in the quarter.

Our Take

We expect the continued increase in Netflix's paid subscriber base in the streaming segment, both domestically and internationally, to drive top-line growth. As its U.S. presence matures, Netflix is planning a rapid expansion abroad. With the launch of services in Spain, Italy and Portugal next week, the company remains confident of completing the worldwide launch by 2016.

However, international expansion and content additions result in cost escalations in the form of technology investments and marketing expenses. Therefore, margins and profitability will be under pressure over the near term.

Also, the online video streaming market remains highly competitive with the presence of veterans like Time Warner Inc.'s TWX HBO. In addition, with new entrants like Amazon.com Inc. AMZN , we expect competition to intensify further.

Currently, Netflix has a Zacks Rank #2 (Buy). Another stock worth consideration in the same space is AMC Networks Inc. AMCX , which sports a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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