- Netflix earnings for Q4 2014 beat estimates on most parameters.
- After missing subscriber numbers in Q3, the subscriber growth story was back on track with 4.3 million additions in Q4.
- Profit margin contractions will hinder short term earnings growth as the company continues its current international expansion drive.
Netflix (NASDAQ:NFLX) reported its Q4 2014 earnings after the market close yesterday (January 20). The company beat analysts’ estimates and its own guidance on every parameter from revenue growth to earnings growth to subscriber additions.
Q4 2014 subscriber additions beats expectations
Netflix reported solid addition to its subscriber base, ending the quarter with 39.11 million domestic subscribers and 18.28 million international subscribers, registering YoY subscriber growth of 17% and 19%, respectively. The subscriber additions came marginally ahead of expectations as well as the company guidance.
|In millions||Actual no of subscribers||Forecast||Absolute addition||Beat %|
The lower than expected subscriber addition was a major cause for investor concern in Netflix earnings Q3 2014. The higher than expected subscriber additions saw the stock price gain by over 15% in after-hours trade (15.6% pre market gain at time of writing) following the Netflix earnings release.
Netflix earnings summary Q4 2014
Netflix revenue as well earnings handily beat the street’s expectations, with higher than expected profit margins. The higher profit margins were fuelled by lower than expected international losses and release of tax benefits related to research & Development (R&D) credit. The company reported 26% revenue growth, which was in-line with analyst estimates.
|Q4 2013||Q4 2014||Analyst estimates||YoY growth||Beat %|
The company registered an 8% decline in earnings, which was driven by profit margin contraction. This was consistent with management commentary in earlier quarter conference calls. Reed Hastings had mentioned in the Q3 conference call:
“If you look at our long-term strategy, we've been extremely consistent over the past three years, saying that, we're going to take all of our profits and put them into international expansion, because we see it as such a big opportunity.”
The earnings growth will accelerate in the coming years, as the international expansion begins to pay off on a larger scale. Quoting Reed Hastings, Netflix CEO from Netflix Q4 earnings release:
“Our international expansion strategy over the last few years has been to expand as fast as we can while staying profitable on a global basis. Progress has been so strong that we now believe we can complete our global expansion over the next two years, while staying profitable, which is earlier than we expected. We then intend to generate material global profits from 2017 onwards.”
Hence, earnings growth will only be a more material value driver in the coming years, once the current international expansion is complete. Netflix revenue and subscriber growth will continue to be the short term value drivers of Netflix stock.
Netflix Cash flow analysis Q4 2014
Netflix cash and cash equivalents at the end of Q4 came in at $1.61 billion. However, the free cash flow for the quarter was negative once again as the content obligations for the quarter ballooned to $9.5 billion. However, the free cash flows will improve once the new markets begin to pay off over time as the newer markets enter a maturity stage and grow in scale. Another catalyst for the company’s future profitability and cash flow’s will also be the increased focus on original content, which the CEO claimed was among the most efficient content on Netflix. The upfront nature of content obligations will continue to depress short term cash flows and will also see the company raise more debt ib the coming quarters, which was outlined in the letter to shareholders.
Netflix Q1 2015 guidance
The management issued the following guidance for Q1 2015.
|Domestic subscribers addition||1.8|
|International subscribers addition||2.25|
|in millions of $, except EPS||Q1 2014||Q1 2015F||YoY growth|
The management expects the margin contraction to continue over the next two years, which will majorly drive the decline in EPS.
Netflix reported a solid holiday quarter 2014, delivering ahead of expectations on every parameter. Expansion into Australia and New Zealand and improving monetization in European markets will drive Netflix revenue in Q1 2015. However, the revenue growth will come with increased up-front costs in the form of content investment. The content investments will not have any short term accretion on EPS, but will drive the long term growth in earnings once the current expansion pans out and Netflix operations scale in foreign markets. Our Netflix stock analysis outlines the current valuation concerns around Netflix while highlighting its current growth, and we continue to remain cautious on the stock. We had earlier provided a preview into Netflix earnings for Q4.
Netflix earnings preview Q4 2014
Netflix is set to report its Q3 2014 earnings on January 20, 2015 after market close. The Netflix earnings report will be for the fiscal quarter ending December 2014. Analyst expectations form Netflix earnings in Q4 is Netflix EPS of $0.45. The company reported an EPS of $0.79 the same quarter, a year ago. (See Figure 1)
Source: Netflix stock chart by Amigobulls
Netflix Earnings for Q3 were not great with the company just about meeting revenue expectations. Netflix EPS of $0.93 did beat analyst estimates but the biggest cause for concern was fewer subscriber additions. Netflix stock sank 20% in after hours trade on the news of subscriber growth decline primarily attributed to Netflix's higher pricing. Netflix stock price is directly related to the number of subscribers it can add and Netflix's international expansion may provide a means for doing just that. The company is expected to add 1.85 million subscribers in the domestic market in Q4. Netflix EPS of $0.45 for Q4 is much lower than Wall Street expectations of $0.84.
What are your thoughts on latest earnings report of Netflix? Do let us know in the comments section below.