Today Netflix released its fourth quarter earnings for 2017 and in a letter to shareholders the streaming giant claimed it had “a beautiful Q4, completing a great year as internet TV expands globally.” The streaming giant continues to expand and touts over 117.5 million members in over 190 countries that enjoy more than 140 million hours of TV shows and movies per day.
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Some highlights include growing its streaming revenue 36% to over $11.6 billion, adding 24 million new memberships (compared to 19 million in 2016), achieving for the first time a full-year positive international contribution profit and more than doubling its global operating income.
Netflix admits it took a hit with a $39 million non-cash charge in the last quarter of 2017 for unreleased content the company decided not to move forward with. “This charge was recognized in content expense in cost of revenues,” the report read. “Despite this unexpected expense, we slightly exceeded our contribution profit and operating income forecast due to our stronger than expected member growth and the timing of international content spend.”
The streamer also mentions several below-the-line items that affected net income, including a pre-tax $26 million non-cash unrealized loss from F/X re-measurement on its Eurobond. “Our tax rate was helped by a $66 million foreign tax benefit, which partially offset a revaluation of our deferred tax assets and the impact from the mandatory deemed repatriation of accumulated foreign earnings related to the recent U.S. tax reform.”
According to the report, average paid streaming memberships rose 25% year-over-year in Q4. This combined with a 9% increase in ASP and global streaming revenue growth amounted to 35%. The company’s $245 million operating income (7.5% margin) versus $154 million the prior year (6.2% margin) was slightly above its $238 million forecast. However, the streamer says, its operating margin for the fiscal year was 7.2%, which was on target with its goal at the beginning of the year.
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The U.S. had an uptick of two million memberships last quarter, which was higher than the forecast of 1.25 million, bringing the total stateside to 5.3 million. Internationally, Netflix hit a new record for quarterly net adds with 6.36 million new memberships. The international segment, the company states, delivered its first full year of positive contribution profit in the company’s history with a contribution profit of $227 million in 2017.
Looking forward, Netflix forecasts that in the first quarter of this year there will be global net adds of 6.35 million, versus the 5 million projected a year ago, with 1.45 million in the U.S. and 4.9 million internationally with a target this year of 10%, up an approximate 300 basis points year-over-year, as in the prior year.
“We believe our big investments in content are paying off,” the report reads. “In 2017, average streaming hours per membership grew by 9% year-over-year. With greater than expected member growth (resulting in more revenue), we now plan to spend $7.5-$8 billion on content in 2018.”
Netflix referred to hits such as 13 Reasons Why, Stranger Things and Bright, noting the success of these titles is the result of a combination of great content and great marketing. Netflix is upping its marketing spend a little faster than revenue for this year, from about $1.3 billion to approximately $2 billion, because the company’s testing results indicate this to be a wise decision. “We want great content, and we want the budget to make the hits we have really big, to drive our membership growth. We’ll grow our technology and development investment to roughly $1.3 billion in 2018.”
Ville Salminen, owner of streaming news site Cordcutting.com and Netflix tracking site Flixable, concurs that Netflix has seen yet another record-breaking quarter. “The stock market is enthusiastic and Netflix’s stock has never been higher. At the time of the company’s Q3 earnings report, the market wasn’t worried about Netflix’s price increase and the market was right. Netflix’s strong slate of original content, and especially international original content, works really well, keeping subscribers hooked to the service’s exclusive offerings.”
In the fourth quarter, Netflix explains its free cash flow amounted to -$524 million, bringing the full year 2017 FCF to -$2 billion, at the lower end of the -$2 to -$2.5 billion range the streamer had previously indicated. “This was largely due to the timing of content payments, which will now occur in 2018.”
Netflix also states its operating margins and income are rising and that its only material cash-ahead-of-P&L-expense is content. “When we develop a title like Bright, the cash spend is 1-3 years before the viewing, associated membership growth and P&L expense. Thus, the faster we grow our originals budget (particularly for self-produced content), the more cash we consume. We are increasing operating margins and expect that in the future, a combination of rising operating profits and slowing growth in original content spend will turn our business FCF positive.”
The company states that in the near term its membership, revenue and original content spend are booming. “We’re growing faster than we expected, which allows us to invest more in original content than we had planned, so our FCF will be around negative $3 to $4 billion in 2018. Given our track record of content investments helping to increase growth, we are excited about the growth in future years from the increased investments we are making in original content this year. We are striving to make the right choices and investments to grow the value of the firm, and that is what also ultimately secures our debt. High yield has rarely seen an equity cushion so thick.”
Verto Analytics CEO Hannu Verkasalo spoke to Netflix’s growth and user engagement over the past year and how the company matches up against competitors like Hulu, Amazon and HBO Go on PC, smartphones and tablets. Overall, while the number of users continues to increase for Netflix, average time spent per user, according to Verto, has decreased, potentially marking the growing presence of its competitors.
“This highly-focused strategy of expanding the subscriber pool and fine-tuning the user experience, while developing original content, has kept Netflix ahead of the game,” says Verkasalo. “However, the decrease in user time spent year-over-year on PCs, smartphones and tablets indicates growing competition between platforms like Amazon Video, Hulu and HBO Go. It also means that some of the new subscribers are not as active as the old ones. Moreover, viewing of Netflix is shifting to new platforms, like smart TVs. Original programming such as Hulu’s The Handmaid’s Tale, Amazon’s The Marvelous Mrs. Maisel and HBO’s Big Little Lies were big winners at the Golden Globes and demonstrates these as forces to be reckoned with. And, with significant growth in smartphone users for Netflix, we can expect to see all players roll out more mobile-friendly features in 2018.”