- Netflix Q4 2015 earnings beat estimates while missing revenue expectations.
- The company reported record high subscriber figures and expects to cross the 80M subscribers milestone next year.
- International segment drove Netflix Q4 growth and is expected to drive the company’s growth in 2016.
Netflix (NASDAQ:NFLX) reported its Q4 2015 earnings yesterday with a higher-than-expected EPS and revenues marginally lower than the analysts’ consensus. In an earlier Netflix Q4 2015 earnings preview published before the earnings release, I highlighted two main focal points for this quarter’s release: global expansion and domestic growth. In recent years, Netflix has been in the process of maintaining a low, single-digit domestic growth rate while striving to expand its international growth by penetrating new markets. Netflix’s recent move to expand globally to 130 new countries accelerates the process and supports Netflix’s strategy to use international markets as a growth driver.
On the domestic streaming side, Netflix added 1.6M subscribers, which was below the estimated 1.62M and presents a two-percentage-point drop in the YoY growth rate from 16% in Q3 to 14% in Q4. Domestic results are slightly disappointing. However, investors expected the low growth to continue, and Netflix already announced a number of times that it will increase the amount of original content while it will try to bring additional content from the leading U.S. studios. Netflix announced it will produce more than 600 hours of original content in 2016 mostly for the U.S. market, and that reflects a 33% YoY increase.
On the international streaming side, Netflix performed extremely well and added more than 4M new subscribers and brought international segment across the 30M subscribers milestone, beating the estimate of 3.5M international subs additions. The impressive increase in international streaming segment reflects a 14% QoQ growth and a 65% YoY growth and firmly supports the company’s direction to drive growth through global expansion. As Netflix expands globally, the international markets require content adjustments to fit their preferences and in 2016, the company will release its first Italian and French original series to strengthen its positioning in these markets.
The overwhelming international segment results offset the slight disappointment from the domestic segment and Netflix reported a total 74.7M streaming subscribers which implied an impressive 8% QoQ growth and 30% YoY increase, mainly driven by the international segment. As shown in the chart below, revenues mirror the subscriber figure trends, and Netflix reported record high quarterly top line of $1.8B with the streaming business accounting for 93% ($1.67B) of the revenues and the declining domestic DVD accounting for the rest 7% ($151M).
These are the comparable figures from Netflix’s earnings release:
|Q4 2015 Actual||Q4 2015 Consensus||Q4 2014 Actual||2015 Actual||2015 Consensus||2014 Actual|
Looking at Q1 2016 Netflix provided guidance that reinforced investors’ confidence with international revenue growth expectation of 57% YoY and domestic revenue growth expected to come in at 5% that reflects a total streaming growth of 30% YoY in Q1 2016 and a record 80M subscribers worldwide. The reassuring guidance and positive Q4 results triggered a surge of 7% in Netflix stock price in after hours trading. Sell-side firms Mizuho Financial (NYSE:MFG) and FBR & Co (NASDAQ:FBRC) reiterated their Netflix rating of Neutral/Outperform with target prices of $120/$125 which implies more than 10% additional upside in Netflix stock price.
Following the astonishing year, Netflix stock registered a 134% gain in 2015, many investors were concerned whether or not the company could deliver to expectations and that the stock was due for a sharp correction. However, the reassuring results and promising Q1 2016 guidance makes Netflix stock one to hold on to in this turbulent economic environment.