Global online streaming powerhouse, Netflix (NFLX US) failed to meet some very high expectations in user growth for 1Q 2017. The internet television leader ended 2016 with almost 94 million subscribers, with users enjoying more than 125 million hours of movies and TV series per day.
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After a record 4Q 2016 in terms of net user additions, Netflix fell short of analysts’ estimates of 5.5 million new subscribers in 1Q 2017 by 500,000. With 5.0 million net users added, Netflix now has 99 million subscribers globally (51 million in the U.S. and 48 million internationally). 70% of the new users came from its international markets continuing a recent trend.
David Wells, the CFO explained that the delay in the new season release of popular web television series “House of Cards” impacted the number of users being added. Due to certain content launches (primarily season 5 of “House of Cards”) moving to 2Q 2017, operating margins in 1Q 2017 were higher at 9.7%, against the company’s estimate of 7.0% for the year. However, operating margins are forecast to be 4.4% in 2Q 2017, whilst net subscriber growth will be 3.2 million in 2Q 2017, almost double over 2Q 2016 net user additions of 1.7 million.
The market showed only a little concern with the 1Q 2017 result and continued its faith in Netflix. After falling 2.6% on the result announcement, it has since risen another 9.1% to reach an all-time high of US$156.45 as of 2 May 2017.
Profitability is growing but cash burn remains high
In an increasingly competitive industry, Netflix is in a perpetual chase for content to win over new users, and satisfy the eyeballs of existing ones.
Net income grew to US$178 million for 1Q 2017, almost as much as net income of all of 2016 as the company seeks to improve profitability over 2017 and 2018. However, as it continued investing in content, free cash flow burn was -US$423 million, following the -US$1.66 billion free cash flow burn in 2016. As we have written before in our article on Content is King, the race is on for who can spend and invest the most into content.