Why Netflix Says It’s All Grown Up Now  

Print Email

When Netflix Inc. (NASDAQ: NFLX) reported first-quarter 2017 results after markets closed Monday, the video distribution company posted diluted earnings per share (EPS) of $0.40 on revenues of $2.64 billion. In the same period a year ago, the company reported EPS of $0.06 on revenues of $1.96 billion. First-quarter results also compare to consensus estimates for EPS of $0.37 and $2.64 billion in revenues.

Shares took a bit of beating in after-hours trading Monday, primarily due to a weaker-than-expected increase in total subscribers. Analysts and investors still consider subscriber additions to be the company’s most important metric.

Sequentially U.S. subscription additions of 1.42 million was far below fourth-quarter additions of 1.93 million and even further below additions of 2.23 million in the first quarter of last year. International additions rose by 3.53 million, down from 5.12 million in the fourth quarter of last year and down from 4.51 million in the year-ago quarter. Combined, Netflix claims 94.36 million paid subscribers worldwide.

For the second quarter of 2017, Netflix expects to double the 1.68 million total subscriber additions added in the second quarter of last year. Operating margin is expected to slip from 9.7% in the first quarter to 4.4% in the second quarter, but the company reiterated its 7% target operating margin for the year.

Regarding the decline in new subscribers, Netflix had this to say:

International net additions decreased 22% year over year, as we lapped our January 2016 launch of over 130 countries, and the accompanying early surge demand, in Q1 2016. Revenue for the international segment grew 62% year over year, excluding a -$12 million impact from currency, while ASP rose 12% year over year on a [foreign exchange] neutral basis. Q1 was the first quarter of consolidated profit for our international segment as profit growth in our more mature territories offset investments in newer markets. Our forward guidance shows that we intend to continue to invest internationally, projecting a small loss for Q2.

Netflix now believes its performance can be more accurately judged by revenue and operating margin growth, rather than by subscriber growth:

For the last several years we’ve had flat operating margins due to established markets funding international expansion with every spare dollar we had. Because of that, the major indicators of our progress were member and revenue growth and US contribution margins. Starting this year, we can be primarily measured by revenue growth and (global) operating margins as our primary metrics.

Netflix shares traded down about 0.8% in after-hours trading to $146.02, in a 52-week range of $84.50 to $148.29. Shares closed Monday at $147.25. Thomson Reuters had a consensus analyst price target of $151.85 before the report.