Netflix Earnings: Four Things to Watch

Subscriber growth, impact of international markets, programming costs and pricing strategies will boost or brake the high-flying stock
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Most analysts are heading into Netflix’s announcement of Q3 2015 earnings in a relatively bullish mood. 

After all the stock has more than doubled so far this year—at a time when TV related stocks have mostly slumped—from about $49.85 to $109.73 on Oct. 13. 

Currently, analysts surveyed by FactSet are estimating about $1.75 billion in revenue and earnings per share of about $0.07 on a GAAP basis, according to the Wall Street Journal

But the company also faces some serious issues. Here are four that investors will be closely watching: 

International Markets

Netflix’s aggressive international push has generally paid off well in its early phases, with the first wave of markets either profitable or closing in on that goal. But its more recent launches into already highly competitive major European territories could prove a tougher slog. In a note issued before the earnings report, Rich Greenfield, the media and tech analyst at BTIG noted that “investors consider France and Germany failures, relative to other international market launches” and that management will need to reassure investors that its expansion plans will pay off. 

Price Increases

The Netflix stock took a tumble in 2011 when it split streaming and DVD services, which resulted in a significant price increase. 

More recently, however, analysts have generally viewed the possibility of price increases in a positive light because it would give them additional revenue to fund more programming and its aggressive international expansion. 

The validity of that theory will be a major question during the call, thanks to an announcement earlier this month that Netflix is raising the price of its most popular Standard 2-stream HD plan from $8.99 to $9.99 in the U.S., Canada, and parts of Latin America for new customers. 

While the impact won’t show up in the Q3 numbers being announced on Oct. 14, management will surely be asked it. If there has been little impact—something most analysts expect—that will help the stock. But if there has been any indication of a slowdown in new subs, investors may become more bearish. 

Subscriber Growth

The SVOD provider’s stock has risen (mostly) and fallen (rarely) on the back of impressive customer gains. 

RBC Capital Markets analyst Mark S. Mahaney, who believes the stock will continue to outperform the market, expects them to pull in 1.15 million net new U.S. streaming subs and 2.4 million net new international streaming subs. 

Management has been forecasting about 1.15 million net additional subs in the U.S. and 2.4 million internationally for Q3. 

Programming Costs

Bears have long argued that programming costs will ultimately undo Netflix and make its current valuations unsustainable. 

While that view hasn’t proved accurate, Greenfield wrote in a note before the earnings call that “many programmers [are] now openly criticizing Netflix, and investors [are] imploring traditional media companies to `take back their content,’” Netflix faces a number of questions about its ongoing ability to license content at attractive prices. 

Ironically, some of those questions stem directly from Netflix’s success. Cord cutting has been relatively small—0.1% of the multichannel sub base in 2013 and only 0.3% in 2014. But it seems to be accelerating in 2015 and a number of programmers are beginning to launch their own OTT services outside the traditional pay TV bundle. 

That increases the competition for content, which could drive up prices, and might further fray traditional pay TV models. If the traditional subscriber fees from multichannel video providers decline, programmers and studios will have to find new revenue, which would push them to demand higher prices. 

Streaming content obligations have already risen from $7.1 billion in Q1 2014 to $10.1 billion in Q3 2015. 

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