Internet streaming upstart,
Net earnings for the quarter were $1.35 per diluted share, up 70% from a year ago. Earnings for the full year were $4.32 per diluted share, up 135% for the year. The stock gained 16% in the aftermarkets to reach $405 a share.
Netflix's revenues were $1.5 billion in the quarter and $5.5 billion for the full year, each up about 25% from the prior periods and in-line with estimates. For 2015, KHX Investments believes revenues and earnings could stay on the same trajectory, and grow in the high 20's. KHX expects revenues of $6.9 billion and earnings of $6.00 per share for the full year 2015.
A take on the Marco Polo set with Benedict Wong, who portrays Kublai Khan, grandson to Genghis Khan.... [+]
Netflix's shares have lost 30% of their value since mid-summer as investors fretted over a slowdown in the US market, losses with international expansion and a spending spree in original productions. With the earnings report, management was able to convince investors that the fears were overblown, and the outlook is solid.
With a price-to-earnings multiple of 75x, Netflix is expensive and will remain volatile. Investors prefer cash flow to be high and predictable, and Netflix has neither. Investors are willing to pay a premium for companies that can deliver growth greater than 25% and these companies tend to move quickly. The problem with high beta names is the downside also comes fast and hard.
International
Netflix is doubling down on its investment in international expansion and plans to raise $1 billion in the debt market to finance the roll out, taking advantage of the final days of era of low rates. Netflix plans to penetrate all 200 of the countries with broadband internet by 2016. It serves 50 countries today. Scale economics are critical for profitability, and the company believes the international business will have positive margins by 2017.
Netflix aims to grow overall company profits while funding international entry, which means it will have to milk the cash cow in the US. Subscribers in US are slowing, but profits could rise anyway. US market generates about two-thirds of Netflix's revenues and all of the company's profits. Netflix's international business is growing faster than the US business, but from a smaller base. Countries are unprofitable in the first year or so, then move into the black.
Netflix will reduce spending on content and marketing in the US to manage profits. Management plans to squeeze 200 basis points out of operating costs every year, cutting spending as growth slows. "We have flexibility in the business model," said CEO Reed Hastings. So, US margins could expand from 30% in 2015 and to 32% in 2016.
The global push will accelerate revenue growth, making cash available to develop and license new content. Netflix plans to continue its subscription-only model that's without advertising, which has worked so far. Each individual country entry is different, but the company is building a template of experiences to understand what works and what doesn't. This year, is working on licenses to entering China, though investment is modest.
Original Programs
And Netflix announced plans to step up production of original programs, known for attracting new subscribers, creating brand loyalty and achieving buzz through critical acclaim. Original programs could become more profitable than the licensing deals.
"Here's the real shocker; last year's original content cost less money than most licensed content, created by the top studios. We will continue to grow our percentage of original content spending for the next several years," said the company's letter to shareholders.
Netflix's Marco Polo was rated as high as HBO's Game of Thrones in Rotten Tomatoes, despite negative views from the critics. Netflix's metrics, like the number of viewers who tuned in and the number that watched the all of the episodes, were exceptionally strong. Netflix will debut a second series of Marco Polo in 2016. See my reviews of Marco Polo here and here and don't miss the show!
And, Netflix finished production on the third series of House of Cards in December, 2014. The series will be released in its entirety on February 27, 2015.
Outlook
More international investment and more original programs are bound to boost growth for Netflix. KHX expects the net ads to accelerate in 2015 after growing 13 million in 2014.
Also helping the company is the surprising intervention by the Obama Administration to keep net neutrality rules intact, going against the views of the FCC. The White House's push will go a long way to keep the carriage fees down for over-the-top players. Netflix already spends $10 million a quarter on ISP access. "The internet should be a utility, open for all, and codified for broad social good," according to Hastings.
Hastings has also voiced concerns about mega-mergers in media that could restrict the degrees of freedom of the internet, namely the proposed merger of Comcast and Time Warner Cable.
The author is long Netflix
Susan Kalla is co-founder of KHX Investments, which advises tech, financial and energy companies in strategy, M&A and Venture Capital.
