Netflix optimistic on further expansion after Q3

Thursday 15 October 2015 | 12:38 CET | Background

Netflix announced its results for the third quarter. These were slightly below market expectations, but Netflix outlined ambitious targets for the coming year. In 2016, the company plans to raise capital to help expand its content portfolio, achieve breakeven results and by the end of the year offer global coverage. Its next launch is in Spain, Italy and Portugal from 20 October, the first new countries since Australia and New Zealand in March and Japan last month. Early 2016, Netflix plans to start in South Korea, Taiwan, Hong Kong and Singapore.  

Netflix reports results for three segments:
  • Streaming US. It added fewer subscribers (0.88 mln) than forecast (1.15 mln), for a total 43.2 million at the end of September. The margin fell by 0.8 percent points from the previous quarter to 32.4 percent. By 2020, Netflix targets a margin of 40 percent. We estimate ARPU increased slightly to USD 8.53. Netflix expects subscriber growth to improve to 1.65 million new customers in Q4, and the margin should grow to 34.0 percent.
  • Streaming international. Subscriber growth (2.74 mln) was better than Netflix's guidance (2.40 mln). The total base reached 26.0 million. The margin improved sharply compared to the previous quarter, from -20 to -13 percent. ARPU rose slightly to USD 7.56, and corrected for currency effects, the figure was up 6 percent from a year earlier. Netflix expects to add 3.84 million new subscribers in Q4, with a margin of -21 percent. 
  • DVD by mail in the US. Netflix's original service lost 254,000 customers for a total 5.1 million. The margin rose to 50.6 percent (Netflix hasn't marketed the service since 2014, helping limit costs). ARPU was largely stable at USD 10.31.

All together revenues rose 23 percent. The margin fell to 20.5 percent from 29.0 in the previous quarter. Operating profit, defined by Netflix as gross profit minus marketing costs, increased 15.2 percent (+6.9% in Q2, +56% a year earlier). With a target of only breakeven in 2016, its clear Netflix still expects more losses from the start-up phase, but by 2017 it should be posting positive margins.

Increasing interdependence

Netflix was notably optimistic, particularly with its improved targets. It's understandable the company is in a hurry, as consumer behaviour is changing quickly and it faces the threat of local newcomers in certain countries. Competitors are also changing strategy, such as new download options at Amazon and an ad-free subscription from Hulu. In addition to the expansion costs, investment in original content is increasing, which over time should reduce the company's dependence on Hollywood, provide a higher margin and possibly reduce churn. In addition to series and documentaries, Netflix is now making its own films (and in future possibly news programmes). Regular price increases will also contribute to growth, and cooperation with telecom operators, like the recent agreement with KPN, and Apple for in-app sign-on on iOS devices will further improve distribution.

This all leads to an increasingly reciprocal relationship with Hollywood: Netflix is becoming less dependent on the big studios for its content while the studios become more dependent on Netflix for revenue. The long-running symbiosis between Hollywood and cable operators is now extending to Netflix. The industry can no longer ignore a player like this. 

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