★ Netflix Reports Q1 2017, Gains 5m Subs, Makes First Profit Internationally (Apr 17, 2017)
Note: this is my first piece of commentary on Q1 2017 earnings. The Q1 2017 tag attached to this post will eventually house all my earnings comments for this quarter, just as the Q4 2016 tag does for last quarter and the earnings tag does for all past earnings comments. Netflix is also one of the dozen or so companies for which I do quarterly slide decks as part of the Jackdaw Research Quarterly Decks Service. See here for more.
Netflix today reported its earnings for Q1 2017, and the results were mostly good, with a few possible red flags. This year, the new season of House of Cards will debut in Q2 rather than Q1, and that makes some of the year on year comparisons tough. One of the results was much weaker Q1 subscriber adds this year than a year ago in the US, worsening what’s already been a trend of slowing growth for several years. Netflix is projecting something of a recovery next quarter, however. In some ways, the biggest news was the first quarterly profit for the international business, which has neared profitability in the past but been plunged deeper into the red by market expansions every time it did so. Now that Netflix is in essentially every country it can be, that won’t be the case anymore, so although it’s projecting a return to small losses next quarter, it’s now saying it wants to be judged partly on growing revenue and margins globally over time, which is a big shift (previously it wanted to be judged on sub growth and domestic margins only).
There were a couple of mild admissions of failure: customer satisfaction in Asia, the Middle East and Africa is not what it could be, and the company’s Crouching Tiger sequel didn’t achieve its goals for original content. Marketing spend will be up at least a little in 2017, and content obligations continue to grow. The company also made clear that the big free cash flow losses caused by its investment in original content will continue for “many years”, though it also said that it will eventually throw off significant cash when it hits a “much larger revenue base”, giving I think the clearest indication yet of what a long-term project positive free cash flow will be. In the meantime, it will continue to borrow to fund that growth. Domestically, profits are growing very rapidly, and the theory continues to be that eventually the International business will reach that level of maturity too and deliver decent margins. But in the meantime, a bet on Netflix continues to be a bet on continued high growth, something which certainly isn’t guaranteed in the US and may end up being tough long term internationally too.
via Netflix Shareholder Letter (PDF)
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