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Netflix Full Year 2016 Results Outlook

NFLX Model Page
Author: Ross Griffiths, Published: January 17, 2017 at 9:00pm EST, Category: Earnings Preview

Key Points to watch for in this quarter's release:
  • Domestic & International net subscriber adds (management guidance of 1.45m and 3.75m).
  • Cash consumption Mgt guidance for -$1.5bn FCFO for '16.
  • Performance of new launches: the Queen, Gilmore Girls etc.
  • Critical reception of original content- including rends in award nominations/wins.
  • International streaming outlook for 2016 country launches.
  • Emergence of trends in maturing domestic market- normal churn levels, slower growth?
  • International subscriber growth trends- mirroring US in more established markets e.g. UK?
  • Effectiveness of advertising in generating subscriber growth.

​Netflix (NASDAQ:NFLX) reports its 4th quarter 2016 results on Wednesday with consensus estimates for subscription growth (Domestic and International) in line with management guidance of 1.45m and 3.75m respectively. As ever with subscription revenue models, the company’s ability to meet and exceed market expectations for subscription growth will underpin the short-term reaction, particularly given the volatility in quarterly net additions Netflix has posted in recent quarterly briefings.

My coverage on Netflix was only recently initiated in early December and whilst I am positive on the prospects for the business at large, the current share price of $133.7 at the time of writing suggests it is in danger of becoming over-valued. This valuation will be revisited post-Q4 announcement, however it is worth noting increasingly positive signals for the outlook of the SVOD space at large, particularly among the major players Netflix and Amazon, who combined received 40% of the nominations in the Best TV Show categories at the 2017 Golden Globes.

The US streaming business has been active since 2007 and original programming began airing in 2013, so signs of domestic streaming growth settling as this segment matures should be monitored. Investors should also be mindful of the completion of the un-grandfathering process and its impact on churn, which had a lesser impact in Q3 compared with Q2 2016 as management guidance for subscription growth was beaten. As stated in my coverage initiation report (click for full report), the variability in quarterly subscription growth should continue, particularly internationally, but a convergence between the underlying organic growth rates of the domestic and international businesses is expected over time.

Forecasts for the competitive landscape remain as stated in the initiation report, with Netflix and Amazon Video rivalling one another as the largest players in the SVOD space internationally. The intensity of this rivalry is already plain to see, and while Amazon Video has some ground to make up, the scale and financial clout of its parent should be reiterated. With quality original programming increasingly proving key in attracting new subscribers, the impact of Netflix’s Q4 launches such as The Crown and Gilmore Girls should be monitored, while remaining cognisant of production costs and over-runs for Q1 2017 launches including A Series of Unfortunate Events and Santa Clarita Diet.
​
Subscription growth proportionate to marketing spend should be examined in the results announcement, particularly domestically, as the effectiveness of advertising becomes a driver of subscriptions in a maturing market. Along with subscriber growth, net cash consumption for the period and management’s outlook for the company’s cash position, this will be one of the metrics watched more closely by analysts during Wednesday’s release.
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The author of this article has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in this article represent the author’s opinions. Click here to visit Ross' Contributor page.  

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