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Netflix Inc. (NFLX - Analyst Report) reported a blockbuster fiscal fourth-quarter 2013. The streaming service provider reported earnings of 79 cents per share that surpassed the Zacks Consensus Estimate by 14 cents. Shares surged 16.6% ($55.27) in after-hours trading.
Revenues of $1.18 billion were also ahead of the Zacks Consensus Estimate of $1.17 billion in the quarter. Most significantly, the company added 2.33 million domestic subscribers, much better than management’s guidance of 2.01 million.
In the last quarter, the international streaming business segment added 1.74 million subscribers, well ahead of management’s guidance of 1.31 million.
Revenues jumped 25.6% from the year-ago quarter, primarily driven by higher international revenues (19.0% of revenues), which surged 118.4% year over year to $221.4 million in the reported quarter.
Domestic revenues (63.0% of revenues) increased 25.6% from the year-ago quarter to $740.6 million. However, DVD revenues plunged 16.2% year over year to $213.3 million.
Revenues climbed 6.3% from the previous quarter, based on a 5.6% increase in domestic revenues and a 21.0% jump in international revenues, which fully offset a 3.9% decline in DVD revenues.
Robust subscriber additions in Netflix’s streaming business (both domestic and international) led to the year-over-year and sequential improvement in the top line. Notably, the company added 11.07 million paid streaming subscribers over the last 12 months. On a sequential basis, Netflix added 3.42 million paid subscribers in the third quarter.
Total streaming subscriber base increased 11.08 million year over year to 44.35 million. Sequentially, total subscriber growth was 4.07 million.
This strong subscriber addition was primarily driven by Netflix’s expanding content portfolio that includes original productions such as Lillyhammer and The Short Game. Netflix also launched the animated series Turbo F.A.S.T in collaboration with DreamWorks Animation (DWA - Snapshot Report).
In the fourth quarter, the company signed a partnership deal with Walt Disney’s (DIS - Analyst Report) Marvel Entertainment. The deal will bring at least four new 13-episode series and a mini-series based on characters such as Daredevil, Jessica Jones, Iron Fist and Luke Cage on Netflix beginning 2015.
Netflix announced that it is reviving The Killing, produced by Fox. The detective program was cancelled by AMC Networks (AMCX - Snapshot Report) after its second season. The company will stream original documentary Mitt in Jan 2014, new seasons of House of Cards (Feb 14), Derek, Hemlock Grove, Orange is the New Black, Lilyhammer as well as BoJack Horseman, an original adult animated series.
Netflix recently announced that will stream the drama series Marco Polo in late 2014. The company will also stream original shows such as Sense 8 (early 2015) and Narcos over the next couple of years.
During the quarter, Netflix upgraded its interface to make it more user-friendly. The new operating interface is expected to make it easier for users to browse content of their choice, as it displays more information about the recommended movies and television shows.
The company also launched streaming application into Virgin Media’s set-top box for U.K. members and also into Denmark’s Waoo! (went live in fourth quarter) and most recently at Com Hem in Sweden.
These new roll outs drove the international subscriber growth. Netflix launched a couple of new marketing campaigns in Brazil and Canada, which are expected to boost subscriber growth, going forward.
Consolidated contribution profit margin (revenues minus cost of revenues and marketing costs) improved 490 basis points (bps) from the year-ago quarter and 130 bps on a sequential basis to 19.3%.
The strong year-over-year growth in contribution profit was primarily driven by 53.1% surge in domestic contribution profit, which fully offset a 13.6% decline in DVD contribution profit and $57.3 million loss in international streaming segment.
The sequential increase was primarily due to 3.3% growth in the DVD segment and 4.3% increase in the domestic business. Despite heightened marketing activities international streaming segment reported much lower loss.
Marketing expense as a percentage of revenues declined 40 bps from the year-ago quarter and 110 bps from the previous quarter. Similarly, technology & development expense as a percentage of revenues decreased 40 bps year over year and 30 bps on a sequential basis.
General & administrative expense as a percentage of revenues increased 20 bps from the year-ago quarter but declined 30 bps from the previous quarter.
As a result of improving cost structure and higher revenue base, operating income jumped to $82.3 million from $19.6 million in the year-ago quarter. Operating income also surged 44.1% quarter over quarter to $82.3 million.
Net income was $48.4 million or 79 cents (better than management’s guided range of $29.0 million/47 cents to $45.0 million/73 cents) compared with $7.9 million or 13 cents in the year-ago quarter and $31.8 million or 52 cents in the previous quarter.
At the end of the fourth quarter, Netflix had $1.20 billion in cash and cash equivalents (including short-term investments) compared with $1.13 billion in the previous quarter. Long-term debt stood at $500.0 million at the end of the quarter.
Netflix generated $41.4 million in cash flow from operations compared with $34.7 million at the end of the previous quarter. The company reported free cash flow of $5.2 million in the quarter.
For the first quarter, management forecasts earnings of 78 cents and net income of $48.0 million. The earnings guidance is in line with the current Zacks Consensus Estimate and is much higher than 31 cents per share reported in the year-ago first quarter.
Domestic and international streaming revenues are expected to be $796.0 million and $267.0 million, respectively. Management expects to add 2.25 million subscribers in the domestic streaming segment and 1.60 million subscribers in the international segment in the first quarter of 2014. Netflix expects total subscribers of 48 million at the end of first quarter.
Domestic streaming contribution profit is expected to be $198.0 million. International streaming loss is expected to be $42.0 million.
Netflix intends to step up its spending on original content and also plans to launch in new international markets in 2014. The company expects to incur an additional $400.0 million long-term debt in the first quarter.
Netflix reported an impressive fourth quarter and also provided an optimistic guidance. We believe that the expanding content portfolio and launch in new international markets will help it to counteract stiff competition from the likes of Amazon Prime, HBO, Hulu, Youtube, iTunes Video and BBC iPlayer.
Netflix will also face competition from Verizon and Sony who are gearing up to enter the streaming business. Moreover, Verizon’s legal win over Federal Communications Commission (FCC) in the net neutrality legal case is a concern for Netflix in the long run.
Additionally, Netflix’s continuous subscriber loss in its DVD business and higher spending on content acquisition are headwinds. Nevertheless, the company’s growing subscriber base will continue to be a major growth factor in the near term.
Further, the company’s partnerships with cable television providers Virgin Media (in the U.K.) and Com Hem (in Sweden) will boost international subscriber base, going forward.
Currently, Netflix sports a Zacks Rank #2 (Buy).