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Netflix Looking at International to Drive Growth, Margins Face Risk

Posted on Thursday, Jan 30th 2014

According to Juniper Research, the market from streaming and downloading services in the country was expected to be more than $4.5 billion last year. Giants like Netflix and Amazon are looking to grow their presence in Europe and Latin American markets. Recently, Wal-mart’s video streaming service, Vudu also expanded their operations in Mexico while continuing to explore opportunities in Europe and Asia.

Netflix’s Financials
Netflix (Nasdaq: NFLX) recently reported stellar fourth quarter results. Revenues for the quarter grew 24% over the year to $1.18 billion, marginally surpassing market projections of $1.17 billion. EPS of $0.79 was significantly higher than the Street’s projections of $0.66 and previous year’s earnings of $0.13 per share.

Netflix’s subscriber base reported a surprising growth during the quarter. They ended the year with more than 44 million members, and reported an addition of 2.3 million domestic subscribers and 1.7 million international subscribers. Overall, they had 33.4 domestic subscribers and 10.9 international subscribers. Their subscriber growth is attributed to a continuously improving the content library and sustained marketing efforts. Marketing expenses for the quarter grew 16% sequentially to $74.4 million.

Netflix reported revenues of $4.4 billion and EPS of $1.85 for the year.

For the current quarter, Netflix expects to add 2.25 million domestic subscribers and another 1.6 million international subscribers, taking their total subscriber base to over 48.2 million. They expect to report an EPS of $0.78 for the quarter, marginally ahead of the Street’s projections of $0.77. They did not give any revenue forecasts for the quarter.

Netflix’s Tiered Pricing
While revenues may be growing, it does not necessarily signify strong cash flows. During recent quarters, the cost of content acquisition has gone up due to added competition fueled by Amazon Prime and Hulu who are competing aggressively. To improve profitability, Netflix is exploring alternate pricing options. In April last year, they had introduced a new plan of $11.99 for subscribers who wished to stream on four devices concurrently. Netflix is also experimenting with additional pricing options such as single stream option, three-device streaming option and pricing plans for standard-definition and high-definition video. They do not plan to make these rate changes applicable to existing customers, resulting in only marginal revenue expansion as existing customers will continue to pay their base rate of $7.99 per month.

Net Neutrality and Netflix
Netflix’s margins could also be impacted due to the implementation of “draconian” laws relating to net neutrality. Verizon’s legal victory over the Federal Communications Commission (FCC) that lets them charge additional fees for delivery of online content over the Internet. The FCC was contending the case of net neutrality that implied that Internet service providers treat all online traffic the same and not give any preference to companies that were paying for a faster net speed. Netflix accounts for 30% of download traffic in the country during peak periods. The case is now under appeal and Netflix will continue to resist the possibility of additional payment if the case continues to yield in Verizon’s favor.

Netflix’s International Growth
Netflix ended the year with continued investments in international operations. According to market reports, they are looking to license content in France and Germany as part of their next round of growth. Within Europe, they also rolled out a streaming application on the Virgin Media set-top box for their U.K. customers. Similar roll out agreements were enacted with multi-channel video programming distributors in Denmark and Sweden.

In other markets, they recently expanded their licensing agreement with the Canadian Broadcasting Corporation that will enable them to stream new seasons of their TV shows. They are also seeing strong growth in their new Latin American markets. Although their current Latin American subscriber base is dominated by customers who have taken the offer of a free sign up, analysts expect paid membership to increase.

Netflix plans to grow significantly in Europe this year and analysts expect them to launch in Italy, Spain, and Turkey soon. According to Pacific Crest Securities, “Netflix can reach 134 million global streaming subscribers: 64 million in the U.S. and 70 million in international markets.” They have not disclosed the timelines of this projected growth, but that is a big number for Netflix to reach.

Netflix’s stock is trading at year high levels of $407.41 with a market capitalization of $24.5 billion.


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