In a few hours Netflix will report earnings for its 4th quarter of 2014. Bottom line expectations are muted today as the streaming video service focuses on subscriber growth and international expansion.
Netflix’s third quarter subscriber acquisition came up short of the company’s internal forecast, sending the stock plummeting 19% over a 24 hour period. This afternoon investors will be looking for encouraging subscriber growth to help reverse the company’s 4 month slide. Here are the factors weighing on the globalization of Netflix.
Netflix has stated that it’s target US subscriber range falls between 60 million and 90 million subs. With 53.1 million total subscribers Netflix still has work to do at home while it continues to expand internationally. Some of the blame for the tepid growth has been shouldered on a price hike announced in May. Margins remain healthy domestically and may top 30% this quarter.
Netflix now operates profitably as a whole in 40 countries and continues to search for opportunities to enter new markets. With Netflix’s heavy investment in foreign markets the 3 million new subs added in Q3 sorely disappointed investors. Netflix will need to perform better this quarter to give shareholders confidence in the company’s mission to establish a global presence.
Netflix may have been the first established online streaming platform, but they aren’t the only one anymore. Amazon (AMZN) Prime Instant Video and HBO Go have both been turning up the heat on Netflix in recent months. Their existence in the market intensifies the content bidding process and raises costs in programming acquisition. All 3 of the major streaming services are now producing original content to lure new users and hedge against rising content licensing costs.
Amazon Prime’s streaming service is riding high after winning 2 Golden Globes with it’s original content. HBO Go is also on the offensive. The subsidiary of Time Warner Cable (TWC) recently announced a standalone streaming service to go toe-to-toe with Netflix. If that arrives as expected before the premier of the new Game of Thrones season on April 12th it could be a game changer. Game of Thrones is the most pirated show in television history by far and a relatively inexpensive alternative which features the hit series could be trouble for Netflix.
The Bottom Line
Content acquisition and international expansion costs have fourth quarter earnings exceptions down 37% year over year. Contributing analysts on Estimize are looking for 50 cents per share this afternoon while Wall Street is projecting 44 cents in EPS.
Netflix has forecasted that it will add 4 million subs this quarter with over half of them coming from overseas. The big picture is that Netflix is investing heavily in Western Europe and needs to show subscriber growth to justify its spending. CFO David Wells said last quarter that international loses peaked out at $US105 million and should be trimmed in the immediate term.
It’s important that Netflix hits its user growth goal this quarter, even if earnings and revenue come up shy. Earnings at Netflix lag subscriber growth because the company offers the first month free.
On the other hand if Netflix fails to break the 4 million new subscribers mark it may have to cool its ambition to become a global brand. That could cap the company’s opportunity and send its $US20 billion market cap spiraling.
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