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3 Secrets to Netflix's Success Beyond Subscriber Growth

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Shares of Netflix (NFLX - Free Report) surged nearly 9% in morning trading Tuesday as investors continue to digest the company’s latest quarterly earnings report. The video streaming giant surpassed estimates on the top and bottom line, thanks in large part to better-than-expected subscriber growth figures—a result that Netflix investors have grown accustom to.

Here at Zacks, we prepare for marquee earnings reports by looking at our exclusive non-financial metrics consensus estimate file. The Zacks Consensus NFM file contains detailed estimate data for business segment metrics and non-financial metrics reported by companies. The data is acquired from digest and contributing broker models and includes the independent research of expert stock market analysts.

Netflix reported net international streaming additions of 5.46 million and net domestic streaming additions of 1.96 million, crushing our respective NFM estimates of 4.96 million and 1.47 million. Overall, Netflix posted net subscriber additions of 7.42 million in the quarter. The platform now has about 125 million total streaming subscribers worldwide.

Investors tend to zero in on Netflix’s subscriber growth as the key metric whenever the company reports, and another strong quarter in this area has likely inspired the stock’s post-earnings momentum. Nevertheless, Netflix owes its strong performance to much more than just membership adds.

Here’s a look a three other things driving Netflix’s remarkable success!

1. Improved International Profitability

Netflix effectively completed its aggressive international expansion in early 2016 and has operated in about 190 countries since then. But simply launching in these international markets was not enough; the company also needed to prove that it could capture foreign audiences and build a sustainable global business.

So far, Netflix has proven that it can grow its platform while improving international profitability. On top of the staggering growth it witnessed in international streaming subscribers this quarter, the company also notched its best quarter in terms of contribution profit for this segment.

Netflix reported contribution profits of $272 million in its international streaming business this quarter, up more than 537% year over year. That result also easily surpassed our NFM estimate, which called for international contribution profits of $234 million.

 

2. Content Innovation

Netflix certainly does not shy away from touting its own original content initiatives, and the company is very public in its belief that original programming holds the key to its future. However, investors should not discredit this as a marketing technique—Netflix’s original content actually is that important.

One thing that Netflix has consistently excelled at is content innovation. The company tries a lot of new things and does not appear tied down to any specific way of approaching content.

“Last year, we expanded our efforts in original programming to unscripted shows across several genres. Our output in this area is now comparable to similarly-focused US domestic cable networks. Shows like Queer Eye and Nailed It are great examples of our ambitions in this area: engaging, buzz-worthy shows that drive lots of enjoyment around the world,” Netflix wrote in its shareholder letter.

Netflix also flaunted its first feature Academy Award, as well as its never-before-seen marketing effort for The Cloverfield Paradox, which announced during Super Bowl Sunday and immediately made available for streaming around the world.

Netflix’s content strategy may appear arbitrary at a distance, but the streaming behemoth has clearly developed a strategy that resonates with its audience and refuses to stay stagnant.

 

3. Revenue Growth Outpacing Subscriber Growth

Another positive trend for Netflix has been its ability to maintain users amid price increases and therefore grow revenue at a faster pace than its subscriber base is growing.

For example, Netflix had about 55.1 million paid domestic streaming subscribers at the end of the quarter, up roughly 1.5% year over year. But domestic streaming revenue soared more than 23.8% to touch $1.82 billion.

The same goes for its international streaming business. Paid international subscribers totaled 63.8 million, which marked year-over-year growth of about 41.8%. Total revenue from this segment surged more than 69.5% to reach $1.78 billion.

 

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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