NFLX had an aggressive International build in 2016. It also increased investment in its original content after so many of its shows (House of Cards, Orange is the New Black, Narcos, Stranger Things, etc) performed so well. The investments were complimented by a price increase that was 75% complete at the end of Q3. 

Subs will remain topic of focus but investors want to see the company deliver. Especially with Forward P/E at a 145x 2017 earnings. The cash burn in Q3 was $506 mln and NFLX said it expected Q4 to come in at a similar level. 

Q4 Guidance:

  • Total Streaming- $2.34 bln
    • Contribution Margin 18.8%
    • Total Membership 91.94 mln
    • Net Adds 5.20 mln

Domestic Streaming

  • Revenue $1.39 bln
  • Contribution Margins 36.9%
  • Total memberships 48.95 mln
  • Net Additions 1.45 mln (Street expectations closer to 1.39 mln)

International Streaming

  • Revenue $947 mln
  • Contribution Margins -7.9%
  • Total Memberships 43.0 mln
  • Net Additions 3.75 mln (Street expectations are for a slight beat)
  • Total
    • Net Income $125 mln

Q3 Recap

  • NFLX reported Q3 (Sep) earnings of $0.12 per share, excluding non-recurring items, $0.07 better than the Capital IQ Consensus of $0.05. Revenues rose 31.7% year/year to $2.29 bln vs the $2.28 bln Capital IQ Consensus.
  • Netflix Q3 Domestic Net Additions 0.370 mln vs 0.30 mln guidance; Q4 guidance is for 1.45 mln, expectations were for ~1.00 mln; Q2 adds was 0.16 mln 
  • Netflix Q3 International Net Additions 3.20 mln vs 2.00 mln guidance; For Q4 NFLX expects addition of 3.75 mln, expectations were for ~3.00 mln; Q2 Adds was 1.52 mln 
  • NFLX issued upside guidance for Q4, seeing EPS of $0.13, excluding non-recurring items, vs. $0.08 Capital IQ Consensus Estimate.


The Take:

Einhorn really put a damper on this stock yesterday as it confirmed an all time high breakout. It seems everyone from Carl Icahn to Einhorn want to take a shot at calling a top in this stock. "Valuation" is the obvious key concern for these guys, but it's all relative to how you value the stock. Take Amazon for example, it has been shot against on valuation for years now. That short selling and top calling has done nothing more than fuel Bezos' land buying spree. 

NFLX has started to break out of a two year range and has cleared enough room for further upside. I want to play to capture that upside. 




Netflix beats by $0.02, reports revs in-line; guides Q1 EPS above consensus

  • Reports Q4 (Dec) earnings of $0.15 per share, $0.02 better than the Capital IQ Consensus of $0.13; revenues rose 35.9% year/year to $2.48 bln vs the $2.47 bln Capital IQ Consensus.
  • Co issues upside guidance for Q1, sees EPS of $0.37, excluding non-recurring items, vs. $0.17 Capital IQ Consensus Estimate.
  • See 16:10 comment for additional metrics.

Excerpts from Shareholders Letter:

  • This was the largest quarter of net additions in our history and was driven by strong acquisition trends in both our US and International segments.
  • 15% ASP growth; ASP for the international segment rose 13% year over year; US contribution margin expanded 395 basis points year-over-year to 38.2%. Margin improvement was greater than expected due primarily to higher-than-forecast revenue and the timing of content deals.
  • Our anticipation for a year-over-year decline in domestic net adds reflects a difficult comparison in the year ago quarter where we exceeded our net adds forecast by 27%. Similarly, in our international segment, we will lap our Rest of World launch in January of last year. We also expect a greater membership impact from our content slate in the second half of 2017. On a sequential basis, we believe our strong Q4 results likely pulled forward some net adds from Q1'17 to Q4'16.
  • Targeting global operating income of 7% (Was 4% in Q4).
  • We anticipate the international segment will be slightly contribution profit positive in Q1. We plan on investing over the remaining quarters of 2017 internationally and, as a result, anticipate an international contribution loss in Q2. On a full year basis, we expect international contribution loss to improve substantially year on year.
  • Net Neutrality- Weakening of US net neutrality laws, should that occur, is unlikely to materially affect our domestic margins or service quality because we are now popular enough with consumers to keep our relationships with ISPs stable. On a public policy basis, however, strong net neutrality is important to support innovation and smaller firms. No one wants ISPs to decide what new and potentially disruptive services can operate over their networks, or to favor one service over another. We hope the new US administration and Congress will recognize that keeping the network neutral drives job growth and innovation.
  • We expect our FCF to be around -$2 billion in 2017 vs. -$1.7 billion in 2016, with FCF loss improving sequentially in Q1'17.
  • We are funding our working capital needs through the debt market. In October, we raised $1 billion of senior notes with a coupon of 4.375%, which will reduce our weighted average cost of capital. We will continue to be a regular issuer of debt to finance our investment in original content as we balance our cash needs with the carrying cost of interest expense


NFLX Key Metrics Courtesy of Briefing