- Netflix is expected to report Q3 FY 15 earnings on Oct 14 after market close.
- The company is expected to report strong subscriber growth but lower profits due to growing content costs.
- Investors are, however, more likely to focus more on Netflix's subscriber growth and give the company a free pass on thinner profits.
Netflix (NASDAQ:NFLX) is expected to report third quarter earnings on Oct. 14 after closing bell. The video streaming giant is expected to report revenue of $1.751 billion, GAAP earnings of $0.08 and adjusted EPS of $0.10. Although Netflix’s management had guided for adjusted earnings of $0.07. Netflix has managed to beat consensus earnings estimate for the last four quarters with a healthy average earnings beat of 26% and many analysts expect the company to extend this streak.
Quarterly Earnings Surprise History
Meanwhile, Netflix stock continues to march forward undeterred by the market downturn. Netflix stock is up 128% YTD.
Subscriber growth expected to impress
The main reason why Netflix’s stock has been doing so well is due to the company’s impressive subscriber growth. Netflix’s management had guided for at least 1.15 million domestic subscriber adds during the quarter, or 18% more than the company added during last year’s comparable quarter, which will bring Netflix’s total domestic subscribers to 43.47 million. Meanwhile, Netflix expects international subscriber growth to continue outpacing domestic growth. The company expect international subscriber adds to clock in at 2.4 million, 17.6% better than last year’s comparable period. This will bring Netflix’s international subscriber base to 25.65 million.
Netflix has been making strong inroads into new international markets. The company has entered several key markets over the past 12 months including Japan, Germany, France, Benelux, Australia, New Zealand, Italy, Spain and Portugal.
Rising content costs to pressure margins
Netflix has been investing heavily in original content as it seeks to cement its position as the world’s leading video streaming company. These investments have been eating into the company’s already thin margins causing Netflix earnings to decline. The expected $0.08 EPS actually represents a huge 48% Y/Y decrease compared to a healthy 24% growth in revenue.
Going by current industry trends, Netflix might have to pay more for its content going forward. There is growing resentment building up with Netflix’ old media rivals which are increasingly viewing Netflix as a rival. During the September conference circuit, several media executives notably at 21st Century Fox and Time Warner talked about a need for the companies to rethink their strategy when licensing content to Netflix. These companies have increasingly been preferring to license content to Hulu instead of Netflix due to what they termed as Hulu’s better compensation. Additionally, the cable companies have been blaming Netflix for the rampant cord-cutting going on in American homes, as well as falling TV ratings.
Netflix recently announced a $1 price increase for its base plan to $9.99 per month, which some analysts see as a demonstration of Netflix’s pricing power while others are less sanguine and view is as a sign that Netflix is feeling the pinch from rising content costs.
Meanwhile Netflix has to contend with increasing competition not only from Hulu and Amazon Prime video but also from Apple (NASDAQ:AAPL) which is reportedly working on a streaming video service.
Going after the low-hanging fruit
Netflix investors are, however, not likely to be worried about the company’s growing content costs. Netflix has been recording good success going after international subscribers which is an easy growth path for the company. International subscriber growth has continued to outpace domestic growth. The good part is that Netflix has plenty of room to run before it can become a truly global player. For the average large Internet company, international revenue accounts for around 70% of overall revenue whereas for Netflix that figure is still a lowly 30%. While Netflix earnings may experience pressure, as long as the company keeps adding subscribers at a healthy clip, investors will continue being happy with Netflix.