Netflix Inc. (NFLX, Financial) is scheduled to release its first-quarter results for fiscal 2015 on April 15, 2015. The company, which operates in three segments – International Streaming, Domestic Streaming, and Domestic DVD, competes with businesses such as Hulu, Amazon.com Inc. (AMZN, Financial) and Time Warner Inc.’s HBO (TWX, Financial) on the one hand and on-demand products offered by pay-TV providers on the other.
The on-demand media giant reported stronger-than-expected results for the fourth quarter of 2014, taking the market by surprise. The company posted sales of $1.48 billion and earnings of $0.72 a share in the quarter, on the back of the streaming entertainment company bringing in 4.33 million new global subscriptions beating the 4.07 million subscriptions added in the prior-year quarter. The company also announced plans to go ‘fully global’ by 2016 end, expecting to profitably reach all 200 of the nations having broadband Internet access in the next two years. For fiscal 2015, Netflix projected 1.8 million new customers being added to its subscriber base within the US, leading to around $37 million or $0.60 a share in profits. The company also forecast an addition of a further 2.25 million international users in the first quarter of 2015, spreading its subscriber base from the current 50 to all 200 nations with broadband Internet connection by 2017. Netflix shares are up 9.6% since the company’s last earnings report.
Original content likely to boost revenues
The substantial growth in Netflix’s subscriptions is primarily due to the company’s diversified streaming content. With the company expecting to launch 20 new shows in 2015, Netflix is making it clear that it takes its Original Content seriously. The company has already launched 14 original series since the beginning of February, including shows for kids, one-hour specials and stand-up comedy specials. Not only has the segment proved to be successful in terms of audience acceptance, Netflix has also been able to economize its original content despite high up-front costs. According to the company, compared to its viewing metrics the original content costs it less money than licensed content created by top studios.
Netflix has also launched its Netflix Recommended TV, a program that evaluates and grades Smart TVs according to their compatibility with Internet-based TV services. The program is also likely to support the company’s business, with manufacturers of Smart TVs lining up for Netflix certifications to boost their sales.
Saturation in domestic subscriptions a worry
Netflix had projected to generate record revenues of $425 million at its International Streaming division during Q1 2015, up from the $388 million in the fourth quarter of fiscal 2014. The company also forecast improvement in its operating loss to $62 million. Although the company is still a long way from seeing profits at this division, it is likely that the company’s aggressive spending in the newer markets to achieve greater scale will begin to pay off sooner than later.
However, Netflix is likely to find it difficult to sustain its impressive Q4 2014 subscriptions growth in Domestic Streaming with the U.S. market nearing saturation. Consequently, experts are looking at a nearly 20% year-over-year decline in net new subscriptions to 1.79 million compared to Netflix’s projection of 1.8 million additions. Further, as the company’s U.S. presence matures; Netflix is taking steps towards a rapid expansion in the international marketplace. However, international expansion is likely to result in cost escalations owing to investments in technology and marketing, thereby exerting significant pressure on profitability and margins in the near term.
Final thoughts
Netflix posted stronger-than-expected fourth quarter earnings for fiscal 2014, on the back of increased subscriptions, and announced plans to increase its global footprint during the next two years. Consequently, experts foresee the company’s paid subscriber base in both domestic and international streaming driving top-line growth during the first quarter of fiscal 2015, with revenue synergies expected to offset expenses related to developing original content and marketing. The company’s recent announcement to plans to increase its share authorization from the current 170 million shares to a whopping 5 billion shares also gives investors reason for cheer. Netflix has beaten the consensus EPS estimate in three of the last four quarters by a margin of 3 cents to 27 cents. Consensus has reduced from 80 cents three months ago to 69 cents a share, so experts opine that the company would have to log EPS of at least 80 cents on revenues of $1.59 billion for a favorable market reaction. Netflix shares have mostly traded in the $316-$486 range in the last three months. The Netflix stock carries a price estimate of $452.39 a share, which is lower than its current price, and a "buy" guidance.
