Netflix Benefits from International Growth

According to a report by Strategy Analytics, consumer spending in the US on video streaming services is expected to grow 22% by $1.19 billion to $6.62 billion. The report further says that the video streaming market is fast approaching saturation in the US as this will be the first time ever that the dollar increase is lower than the previous year’s increase. In 2015, the industry had seen a growth of $1.21 billion over the year. Netflix (Nasdaq: NFLX), however, remains the leading player in the US market with 53% of the subscriptions. Amazon is a distant second with 25% share followed by Hulu at 13%.

Netflix’s Financials

Netflix’s Q2 revenues grew 25.6% over the year to $2.29 billion, marginally ahead of the Street’s forecast of $2.28 billion. EPS of $0.12 was significantly better than the market’s projections of $0.06 for the quarter.

During the quarter, Netflix added 3.6 million net subscribers, ending the quarter with 86.7 million total subscribers of which 83.28 million were paid members. The market had forecast an addition of 2.3 million net subscribers in the quarter. US subscribers grew by 370,000, ahead of the company’s forecast of 300,000, to a total of 47.5 million subscribers. International subscribers grew by 3.2 million to 39.25 million subscribers. The continued uptick on subscribers is impressive considering that Netflix had increased subscription prices even for older members whose rates had been grandfathered. The market was impressed with the results, driving the stock 20% upwards soon after result announcement.

For the current quarter, Netflix forecast an addition of 5.2 million subscribers compared with the market’s forecast of 4.592 million.

Netflix’s Content Growth

Netflix continued to invest heavily in content development. It is now gearing up to spend $6 billion on content next year, compared with $1 billion in 2016, with continued focus on original programming. Earlier this summer, Netflix had released the second season of Narcos, its original program on Colombian kingpin Pablo Escobar to good reviews. Other successful original series launched during the quarter include Stranger Things and Luke Cage. It now plans to launch Crown, a show about the reign of Queen Elizabeth II. It is expected to be released in November this year. Netflix plans to develop over 1,000 hours of original programming in 2017, up from 600 hours in the current year.

Netflix’s International Growth

The quarter’s impressive subscriber performance was also driven by its international markets as it continues to invest in international offerings. During the quarter, Netflix localized its services for Poland and Turkey by accepting payment in local currency and adding a local-language user interface. It has also added subtitles and dubbing to some local content. The added capabilities bring the languages supported by Netflix app and site to 22, still a far cry from Alphabet’s YouTube, which is available in 50 languages.

Despite its regional ambitions, Netflix has ruled out the possibility of expanding in China in the near future. Due to the regulatory environment in the country, it ruled out expansion plans and instead will be looking to license content to existing online service providers in China. It hopes to be able to launch a service in China in the longer run.

But now that Netflix’s international roll out has happened, it believes that it can look at improving profitability. Netflix did not divulge detailed metrics on international profitability but plans on releasing them during the first quarter results for next year.

Netflix’s stock is trading at $121.87 with a market capitalization of $52.3 billion. It touched a high of $133.27 in December last year.

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