Netflix: Color on Qtr
- Needham Research notes 1) paid sub adds 27% above estimates; 2) higher profit margins than expected; 3) more owned IP (1,000 hours produced) suggests growing library value; and 4) rising profitability as NFLX grows revenue. What worries firm includes: 1) NFLX seems to be priced for perfection, hitting all-time highs; 2) FY16 FCF guidance 90 days ago was for negative $1.5B, yet FY16 came in at $1.6B and guidance is for negative $2B in FY17, implying NFLX must access capital markets to close its funding gap; 3) 1Q17 sub growth guidance & tough comps vs global launch in FY16; 4) no planned price increases implies no ASP growth; and 5) NFLX up only 8% on 27% subscriber over-delivery.
- FBR Capital raises tgt to $144 from $100, retains Market Perform. NFLX accelerated to surprisingly robust sub growth in 4Q16, its second quarter in a row of meaningful upside versus guidance. This argues that the disappointing performance earlier in 2016 from un-grandfathering has run its course and that some of those who dropped the service are coming back. It also, more basically, suggests that NFLX's offer is really resonating with consumers. As great as 4Q16 was, the outlook for 2017 is one of sub growth not accelerating from a high peak-while price hikes decelerate.
- Stifel Research raises tgt to $155. Firm notes Netflix is on track to surpass 100mm subscribers by 2Q:17 and the company remains committed to its long-term strategy of building the most dominant, globally-appealing library of content it can finance. Guidance for 1Q:17 came in slightly below consensus expectations domestically but materially above forecasts internationally. Approximately 47% of total members are now from outside the U.S., and firm expects the international crossover point to occur by 3Q:17. Netflix guided to 2017 GAAP operating margins of 7% (from ~4% in 2016) with its target of generating "material global profits in 2017 and beyond."
- RBC Capital is raising its tgt to $175 from $150. Netflix posted better-than-strong Q4 EPS results, beating expectations in terms of subs AND profits. Still firm's #1 Pick. Although it faced elevated churn in mid-‘16 due to price increases, it did succeed with the price increase. The Key Domestic Evidence is accelerating Revenue Growth in Q4 (27%) and record-high Contribution Margin (38%). The Key International Evidence is Record High Sub Adds (5.1MM) and first-ever Contribution Profit ($16MM in Q1). Cash burn remains high but this should be the peak burn year. Meanwhile, Operating Margins are now likely to consistently grind higher (4% in '16, 7% in '17, 9% in '19...).
- Pivotal Research is raising its tgt to $170 from previous street high $155. NFLX continued the strong trends from 3Q, as they have taken advantage of the drawing power of originals to generate strong better than expected subscriber growth while also taking a successful material price hike, a very powerful combination. Reflecting the benefits of their grandfathered price increases ARPU per streaming subscriber rose +12% in-line with consensus. The moderate slowdown in 1Q are reflective of the launch schedule for key original content releases (as an example House of Cards release was moved from 1Q to 2Q) and it appears new content launches are weighted toward 2Q and beyond. The only area that was worse than expectations was free cash flow as NFLX generated a (-$639M) loss in 4Q vs. (-$500M) guidance which appears related to timing. Guidance for free cash flow losses for '17 was also higher than expected reflecting the more upfront nature of the cash costs associated with developing content in-house.