- Netflix is due to report Q1 2016 earnings on Apr. 18, 2016 after markets close.
- Netflix stock could suffer if it fails to achieve its domestic growth target by a big margin.
- The stock can, however, make good gains if the company posts good subscriber growth and tops earnings estimates.
Video streaming company Netflix (NASDAQ:NFLX) is due to report Q1 2016 earnings on Apr. 18, 2016 after market close. The consensus is for Netflix to report EPS of $0.03 and revenue of $1.96B compared to EPS of $0.38 and revenue of $1.40B during Q1 2015. Netflix's own guidance points to EPS of $0.03 and revenue of $1.813B. Meanwhile, there is an earnings whisper on the Street that Netflix might exceed earnings estimate by posting EPS of $0.05. If this bullish prediction turns out to be true it won't come as a surprise considering that Netflix has met or exceeded consensus earnings estimates over the last four consecutive quarters.
Netflix Quarterly Earnings Surprise History
Subscriber Growth in Focus
When it comes to Netflix, however, there is one growth metric that investors usually watch avidly, and one that can easily sway the stock: subscriber growth. During its fourth quarter earnings call, Netflix said that it expects to add 1.75M new customers in its domestic market, and another 4.35M in international markets. That compares with 1.9M and 2.43M net customer additions in the domestic and international markets, respectively, that Netflix posted during last year's comparable quarter.
Investors will note that net additions in the U.S. market have been slowing down over the past quarters while subscriber growth in international markets has been picking up steam. Netflix has actually become a victim of its own success. The company has been growing much faster-than-expected in its domestic market over the past few years and now the company's domestic growth runways have been dwindling. Back in 2012, Netflix said that it expected its domestic market to contribute about 40% to its top line by 2020. The company expected its domestic contribution margin to increase by 100 basis points every quarter. But the company has been growing at almost double this rate, with the domestic market contributing 34.3% to its top line during the last quarter. Netflix has now covered more than half the U.S. market and has to contend with the law of large numbers where its domestic subscriber growth is bound to continue slowing down as the quarters roll on.
Between Q1 2014 and Q1 2015, Netflix's domestic contribution margin grew 370 basis points Q/Q, almost quadruple the company's original target. Netflix said that it expects this metric to grow 160 basis points between Q4 2015 and Q1 2016 to 35.9%, still above its target but considerably slower than a year ago. Netflix warned that this trend was expected to persist in the coming quarters:
''But the larger thing is that it’s just the next 50 million or a little harder than the first 50 million in terms of growth and we are doing everything on the content side, on the product side, we’re continuing to improve that service, but you’re seeing that the law or large numbers when you grow steady at 5 million, 6 million net additions a year on a larger number then that percentage growth is smaller year-over-year and that’s what we predicted and that’s what you see in our guide for Q1 as well.''
Netflix's international subscriber growth, however, has been impressive over the past few years and is expected to remain hot in the coming quarters. Netflix has already entered 190 countries and this should give the company ample growth runways for years to come.
International Growth, High Content Costs To Keep Earnings Depressed
Investors are also likely to be watching keenly to see if the pressure on Netflix's bottom line will show some signs of improvement. Netflix's earnings have come under a lot of pressure as the company continues to expand into international markets, and also due to the company's growing content costs. But Netflix has already covered more than three-quarters of international markets and will be concentrating more on diversifying its content in these markets to meet local needs. This should ease some pressure on the bottom line. Netflix has had to increasingly bid for content from its traditional cable TV providers against Amazon (NASDAQ:AMZN) and Hulu which enjoys the backing of 4 of 6 of the largest cable TV companies. This is not something that it likely to change soon.
Consistent profitability for Netflix might, however, not be far off. Early this year the company discussed its long-term plans with investors where it said that it expects to start reporting a profit consistently as early as 2017. Investors might therefore start seeing some gradual improvement in Netflix earnings during the current year.
Netflix stock is down 6.5% YTD, though it's been rallying strongly since February and is now 30% above its February lows. If Netflix's international markets are able to post strong subscriber growth and the company is able to top consensus earnings estimates, Netflix stock could mount another strong rally after the earnings call.