Netflix, Inc. (NFLX) reported fourth-quarter 2014 non-GAAP earnings of 72 cents per share that comfortably surpassed the Zacks Consensus Estimate of 44 cents. The company’s revenues rose 26% year over year to $1.48 billion, in line with the Zacks Consensus Estimate. The growth was driven by higher revenues from International Streaming and Domestic Streaming.
Netflix’s share prices rose 16% in after-hours trading on Tuesday eventually closing at $348.80, representing 3.4% ($11.46) increase from the previous closing price.
Quarter Details — Revenues
International revenues (26% of revenues) soared 75% year over year to $387.8 million driven by robust growth in paid members.
Domestic revenues (62% of revenues) improved 24% from the year-ago quarter to $917.4 million.
However, DVD revenues (12% of revenues) witnessed 15.8% year-over-year decline to $179.5 million.
Subscriber Base
In 2014, Netflix recorded 13.0 million new members, as against 11.1 million in 2013, bringing global members to 57.4 million. In the fourth quarter, the company added 4.33 million members compared with 4.07 million in the year-ago period. Paid members totaled 54.48 million, up from 41.43 million in the year-ago quarter.
In the International Streaming segment, the company recorded 18.28 million members as against 10.93 million in fourth-quarter 2013. It recorded 2.43 million net new members in the fourth quarter, compared with 1.74 million a year ago. Paid members were 16.78 million, up from 9.72 million at the end of the year-ago quarter.
In the Domestic segment, Netflix’s subscriber base totaled 39.11 million, up from 33.42 last year. Paid members grew to 37.70 million from 31.71 million in the year-ago quarter.
Margins
Consolidated contribution profit margin (revenues minus the cost of revenues and marketing costs) improved 430 basis points (bps) from the year-ago quarter to 16.5%.
Operating income fell 21% year over year to $65.1 million while operating margin declined 260 bps to 4.4%.
Net income was $44 million compared with $48.4 million in the year-ago quarter.
Balance Sheet
At the end of 2014, Netflix had $1.11 billion in cash and cash equivalents compared with $605 million in 2013.
Cash used in operations were $38.4 million compared with cash provided by operations of $41.4 million at the end of the year-ago quarter. The company reported free cash outflow of $77.7 million.
Netflix’s total streaming content obligations increased to $9.5 billion from $7.3 billion in the year ago quarter.
Outlook
For the first quarter 2015, management forecasts earnings of 60 cents and net income of $37 million. Domestic and international streaming revenues are expected to be $973 million and $425 million, respectively. Total streaming revenues are expected to be $1.40 billion.
Management expects to add 1.80 million subscribers in the domestic streaming segment and 2.25 million in the international in the first quarter 2015. Netflix expects total subscribers of 61.44 million at the end of the first quarter 2015.
Domestic streaming contribution profit is expected to be $293 million. International streaming loss is expected to increase to $62 million on a sequential basis, due to increased marketing spend. Netflix forecasts operating income of $79 million for the first quarter 2015.
Our Take
We believe Netflix’s significant subscriber growth in the fourth quarter is attributed to its diversified streaming content. According to reports, the company expects to launch 20 shows in 2015, almost double of 2013 and 2014 premiers. Recently, Netflix also announced an independent smart TV evaluation program — Netflix Recommended TV — to grade smart TVs that are best compatible with its Internet TV services. We expect this program to boost Netflix’s business going forward.
Netflix also has plans to debut in Australia and New Zealand in 2015, driving international streaming revenues further.
However, online video streaming market remains highly competitive with veterans like Time Warner Inc.’s (TWX). In addition, with new entrants like Amazon.com Inc. (AMZN), and Yahoo! Inc. (YHOO), we expect competition to further intensify for the company in the coming days.
Currently, Netflix has a Zacks Rank #3 (Hold).
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