Netflix, Inc. Beats Subscriber Guidance, Paints Wider Margin Targets

By Anders Bylund Markets Fool.com

Netflix (NASDAQ: NFLX) reported results for the fourth quarter of the fiscal year on Wednesday, a few minutes after the closing bell. The streaming video veteran exceeded its own guidance targets across the board, and share prices spiked more than 8% higher in after-hours trading.

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Netflix's fourth-quarter results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$2.48 billion

$1.82 billion

36%

Net income

$66.7 million

$43.2 million

54%

GAAP EPS (diluted)

$0.15

$0.10

50%

Data source: Netflix.

What happened with Netflix this quarter?

The financial data above sprung from the largest quarterly helping of subscriber additions in the company's history:

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  • Netflix added 5.1 million net new subscribers in the international segment this quarter, comfortably ahead of the 3.2 million guidance target.
  • In the domestic division, management had expected roughly 1.5 million net new accounts. Instead, the tally ran all the way up to 1.9 million.
  • The official guidance for the fourth quarter pointed to earnings of $0.13 per share, culled from total streaming revenue near $2.3 billion. The sales surprise worked out to a rounding error; Netflix crushed the bottom-line target.

Netflix offered the usual slate of detailed guidance for the coming quarter:

  • Management expects to add 5.2 million net new subscribers in the first quarter, including 1.5 million domestic customers and 3.7 million new accounts overseas. The sequential decrease rests on a difficult year-over-year comparison, as Netflix launched 130 new international markets in the year-ago period while beating the domestic subscriber additions guidance by 27%.
  • The 5.5% increase in subscriber numbers should lead to 7% higher streaming sales, as customers worldwide continue moving up to pricier and higher-quality streaming plans.
  • Finally, unadjusted earnings should stop at approximately $0.37 per diluted share in the first quarter. That would be more than a sixfold year-over-year increase, resting on significantly stronger operating margins.

Image source: Netflix.

What management had to say

Yes, this is the quarter where Netflix starts to shift its focus over from maximum subscriber growth to dramatically larger net profits.

Since our global expansion is proceeding well, we intend to grow our global operating margin for many years ahead. We've been around a 4% annual operating margin for the past two years, and we are targeting about 7% for the full year 2017 based on current F/X rates.

From here, we will seek to steadily increase revenue and operating margin as we balance growth and profitability. We are in no rush to push margins up too quickly, as we want to ensure we are investing aggressively enough to continue to lead internet TV around the world.

-- Netflix CEO Reed Hastings and CFO David Wells, in a prepared statement

Looking ahead

The first quarter's 9% operating margins are not expected to last, falling back toward the stated 7% target later on. The timing of large-budget content productions will make things lumpy for the foreseeable future, and the big-ticket political drama House of Cards is moving from the first to the second quarter this year.

Likewise, Netflix's cash flows will ebb and flow. In 2016, the company burned through $1.7 billion of negative free cash flow in order to build the award-winning content slate, and that total should increase to roughly $2.0 billion in 2017. Management expects to fund these expenses by taking on more debt in 2017 and beyond.

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Anders Bylund owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.