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Streaming giant Netflix $NFLX reported better than expected revenue and subscriber numbers in it's third quarter earnings release Monday. $NFLX climbed to new highs before the release and was up another 4% after. Though the company was lower on EPS expectations investors are happy with content, International reach and the recent price hikes. 

Netflix Narcos

Narcos: Netflix's Most popular Show in 2017

Netflix $NFLX was the first FANG company to release September quarter earnings and was hyped up heading in.

Earnings: Earned 29 cents a a share, below the 32-cent analysts consensus. However of $2.99 billion was above the $2.97 billion expectations. Subscribers were also more than expected.

Reaction: NetFlix $NFLX Nasdaq After Hours 205.16% After a New ATH of 208.02. Netflix is up more than 70% in the past year.

Subscribers:

  • Added 850,000 new domestic subscribers, above its 750,000 it forecast and 774,000 consensus. 
  • Added 4,45 million new international subscribers, above its 3.65 million forecast and 3.72 million consensus.
  • Of note they are lower than the 1.07 million and 4.14 million Netflix added in the second quarter.

"We added a Q3-record 5.3 million memberships globally (up 49% year-over-year) as we continued to benefit from strong appetite for our original series and films, as well as the adoption of internet entertainment across the world. Relative to our guidance of 4.4 million net adds, we under-forecasted both US and international acquisition. Year to date net adds of 15.5 million are up 29% versus last year."

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NetFlix Q3 Highlights

  • Global streaming revenue in Q3 rose 33% year over year, driven by a 24% increase in average paid
    memberships and 7% growth in ASP.
  • Operating income nearly doubled year-over-year to $209 million with our Q3 global operating margin of 7.0% putting us right on track to achieve our full year target of 7%.
  • EPS of $0.29 included a pre-tax $51 million non-cash loss from F/X remeasurement on our Euro bond (or $39 million after tax based on a 24% tax rate).
  • Higher than expected excess tax benefit from stock based compensation benefited our tax rate by $5 million vs. our forecast. As a reminder, the quarterly guidance we provide is our actual internal forecast at the time we report.
  • Domestic contribution margin in Q3 of 35.8% vs. 36.4% last year was below our forecast of 37.1% due primarily to the earlier-than-anticipated close of certain content deals.
  • The international contribution margin rate was 4.7%. Q1 operating margin was 7.0% vs. 4.6% a year ago.
  • The foreign currency impact in the quarter was +$13 million and Q3 international revenue grew 54% year over year, excluding currency. F/X-neutral ASP increased 7.4% year over year. International contribution profit margin of 4.7% exceeded our 2.3% guidance, also due to the timing of content deals.

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Cash Position (FCT)

 "Free cash flow in Q3 totaled -$465 million vs. -$506 million last year and -$608 million in Q2’17. There is no change to our expectation for FCF of -$2.0 to -$2.5 billion for the full year 2017."

Guidance:

For the fourth quarter, it sees revenues of $3.27 a share, above the $3.15 billion consensus.

Looking ahead, Netflix expects Q4 domestic streaming adds of 1.25M vs. 1.63M consensus and international streaming additions of 5.05M vs. 4.66M consensus.

For Q4, we forecast global net adds of 6.30m (1.25m in the US and 5.05m internationally) vs. 7.05m in the year ago quarter (which was our all-time high for quarterly net adds). We recently announced price adjustments in many markets to our HD and 4K video plans while keeping our SD plan mostly unchanged (still $7.99 in the US, for instance). Existing members will be notified and their prices will be adjusted on a rolling basis over the next few months. Increased revenue over time will help us grow our content offering and continue our global operating margin growth.

We’ve been focused on growing global operating margin as our primary profitability metric since hitting our 2020 US contribution margin goal of 40% this past Q1. This allows us to avoid near term optimization for specific domestic or international contribution margin targets which could impede our long term growth.

For instance, we anticipate our Q4’17 US contribution margin will be 34.4% (a decline both year-on-year and sequentially) as we boost our marketing investment against a growing content slate. We spend disproportionately in the US to generate media and influencer awareness for our programming which we believe, in turn, is an effective way to facilitate word of mouth globally. In our
international segment, we are on track to generate positive contribution profit for the full year. As we move into 2018, we aim to achieve steady improvement in international profitability and a growing operating margin as our success in many large markets helps fund investments throughout Asia and the rest of the world.

Source: Netflix Q3 shareholder letter

Note: On Oct. 5 raised its U.S. Standard and Premium plans by $1 and $2 per month, respectively, to $11 and $14. In 2016. $NFLX has said price hikes for customers previously grandfathered in at lower prices hurt subscriber growth for a while.

Content Library and Costs

Walt Disney Co. $DIS has said it will pull its films off Netflix by 2020 end and launch it's own streaming service in 2019 that will become the exclusive home for Disney, Pixar, Marvel and Star Wars films.
 
Millarworld 1
 
Netflix has also made moves on this front with it's First Acquisition With Comic Publisher Millarworld. $NFLXplans to spend $7 billion on content in 2018.
 
Source: NeFlix, Alpha Street, TradersCommunity

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