Outlook: Netflix Faces Slow Domestic Growth and Increased Costs
Q4 results exceed expectations from subs growth and margin. Revenue was $1,175 million versus our estimate of $1,164 million, and consensus of $1,166 million. It did not provide revenue guidance. Domestic streaming, domestic DVD, and international streaming subs figures all exceeded our expectations. EPS was $0.79, versus our estimate of $0.60, consensus of $0.66, and guidance of $0.47 – 0.73, driven by top-line growth and better-than-expected gross margin.
Contribution profit for Netflix’s (NASDAQ:NFLX) domestic and international streaming businesses has steadily improved. In the last eight quarters, the contribution margin for the domestic streaming business has increased to 23 percent from 14 percent, and for the international streaming business to (26) percent from (240) percent, demonstrating some leverage from lower marketing spending and impressive control over content spending, at least in the short-term. We continue to believe that lower content quantity will lead to fewer subscribers joining the service longer-term.
We expect domestic streaming subscribers to continue to grow for the foreseeable future as more original content becomes available. For Q1, Netflix guided to domestic streaming subscriber net additions of 2.25 million, compared to 2.03 million last year, helped by the positive impact of seasonality. International expansion should continue as domestic growth slows, but it will likely weigh heavily on consolidated contribution profit for the foreseeable future.