Netflix Q3 2014 earnings recap

Netflix added over three million members in Q3 2014, ending the quarter with 53.1 million global members and $1.22 billion in revenue. The video streaming company is forecasting the addition of another four million members in Q4, ending 2014 with over 57 million global members.

With a variety of original series like House of Cards and Orange is the New Black, films and exclusive licensed content, Netflix “will continue to thrill our members and expand our membership.”

Q3 Results, Q4 Expectations

Netflix added about a million new members here in the United States, finishing the quarter with 37.22 million members, with lower net additions than its forecast and year-to-year. Domestic streaming revenue of $877 million, in-line with forecasts, but higher year-to-year. International revenue of $346 million, again in-line with estimates, grew 89% year-to-year, and faster than membership.

Separate from forecast variability, year on year net additions in the US were down from 1.3 million in Q3 2013 to one million this quarter. The company is citing “the slightly higher prices we now have compared to a year ago” as the primary cause. Netflix’s reasoning is that “slightly higher prices result in slightly less growth, other things being equal, and this is manifested more clearly in higher adoption markets such as the US.”

In hindsight, the company beleives that late Q2 and early Q3 “the impact of higher prices appeared to be offset for about two months by the large positive reaction to Season Two of Orange is the New Black.” The effect of slightly higher prices is factored into Netflix’s Q4 forecast.

Since the company’s per-membger viewing and retention in the US “are as strong as ever,” Netflix “don’t thing increased competition from piracy, TV Everywhere, Amazon Prime Instant Video, Hulu, etc. is a major factor.”

In September, Netflix launched in France, Germany, Austria, Switzerland, Belgium and Luxembourg, adding about 66 million households to the company’s addressable market. In recent days, the Netflix app has been added to set-top boses from SFR in France and Deutsche Telekom in Germany, and the company expects the app to come to Orange and Bouygues in France, as well as Belgacom in Belgium.

As expected, there’es a full quarter of new market expenses weighing on our international contribuiton margins in Q4, increasing contribution loss from Q3 to Q4. Netflix’s international markets launches prior to this year (Canada four years ago-Netherlands a year ago) are now “completely profitable on a contribution basis” and will continue to help the company fund new markets. Morever, contribution margin from Canada, Netflix’s first expansion market, now approximates the US.

Given “how well our international expansion has performed,” the company intends substantial further expansion in 2014, consistent with its strategy.

US contribution margin increases over 30%

Netflix’s US contribution margin grew to 28.6% in Q3. After achieving 30% contribution margin, likely in Q1 or Q2 2015, “we will seek to grow margins an average of 200 basis points per year for the following years.” Ideally, Netflix will “achieve 40% contribution margin five years after achiving 30%.” This increase in the company’s domestic contribution margin “gives us room to increase content as we grow, as well as substantial domestic profitability.

Content

In Q3, Netflix launched several new original shows, documentaries and comedy specials while ensuring furture access to one of the North American fall TV season’s hottest shows, Gotham. In the company’s second year as a programmer, Netflix took home seven Emmy awards.

Original Series

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Bojack Horseman marked the company’s expansion into the adult animated comedy genre. In the past, Netflix licensed back seasons of already successful shows like Archer, Futurama and Bob’s Burgers. Bojack Horseman, starring Will Arnett, Aaron Paul and Amy Sedaris, drew more viewers in its first few weeks than “any of these established network shows over a comparable period on Netflix.” Bojack Horseman’s second season is now in production for a release next year.

In Q3, Netflix also launched a second season of Hemlock Grove and 4th and final season of The Killing. Both shows “have been well received globally.” The company is now in pre-production of the final season of Hemlock Grove. Netflix also premiered two acclaimed shows from across the pond in North America: Happy Valley (in US and Canada) and Peaky Blinders (US only)..

Netflix is also looking forward to the December 12 release of the company’s next major series Marco Polo, an “epic, cinematic tale of power, adventure and betrayal.”

The company is also currently in production on nine Netflix original sereis around the world and during the quarter announced comedy series Love from Judd Apatow, premiering in 2016.

Original Documentary, Kids, Comedy

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Beyond scripted series, the company launched three original documentaries in the quarter, Battered Bastards of Baseball, Mission Blue and Print the Legend. These documentaries have grown in audience reach and “have positioned Netflix as a significant player in a category that attracts some of the most loyal and intense viewers. Finishing off the year, the company will release E-Team, a “powerful journalistic film” from Oscar winning director Ross Kauffman and Katy Chevigny, and Virunga, a “riveting film about the tensions over one of Africa’s best known national parks and the home of the mountain gorillas.”

Netflix continues to be a “key destination for kids and families.” The company now offers members 75 kids sereis that are each delighting over two million viewers on Netflix. More than a dozen of these series, many of which are exclusive to the service, reach over five million viewers. During the quarter, Netflix announced partnerships with Saban Brands to reboot the Popples animated series, with Rainbow Studios to extend their Winx Club stories and with storied producr Avia Arad and 41 Entertainment to produce a CGI film and series with a new take on the origin of King Kong. In Q4, the company will launch the premiere episodes of two original series from DreamWorks Animation, the retun of the Veggie Tales franchise and All Hail King Julien, based on the Madagascar character.

Last week, Chelsea Handler’s Uganda Be Kidding Me Live arrived globally on Netflix to strong viewing and rave reviews. Next year, Handler will create four comedy documentaries for the company with her revamped talk show to follow in 2016. In Q3, Jim Jeffries brought his latest stand-up show to Netflix members, while this quarter, the service’s members will enjoy new material from Chelsea Peretti (Brooklyn Nine-Nine), Bill Burr & Wyatt Cenac (The Daily Show) and Bill Cosby.

Original Films

On August 28th, 2015, Netflix will release its first original film, Crouching Tiger Hidden Dragon: Green Legend. A big budget continuation of the 2000 Oscar-nominated film, it will debut simulaneously on select global IMAX screens and in Ultra HD 4K on Netflix, offering consumers the option to “see this beautiful action film how and when they want.” Separately, the company announced plans to release only on Netflix, four new Adam Sandler-featuring comedies, beginning in early 2016. The company is investing in original films “because doing so can be favorable economically compared to current Pay TV deals and is consistent with the desires of the global on-demand generation to enjoy new movies without having to wait for months after they debut in US theaters.”

Multi-territory Television Licensing

In Q3, Netflix secured window rights from Warner Bros. for the Fox show Gotham in all current and planned territories for the sever. This deal will deliver the series to Netflix members “soon after the broadcast completion of each season” and ensures that the service will be “the only subscription video service in these territories to offer the Batman origin series, commercial free and on demand in full screen presentations.

In Netflix’s new European territories, the service debuted as original series, Emmy-winning Fargo from MGM Television as well as From Dusk Till Dawn from El Rey and Penny Dreadful from CBS Televisionn. These deals ensure Netflix’s international members access to hit US television series “without having to wait the months or years imposed by traditional TV models and should help to reduce piracy in those markets.”

Product

Improved Laptop Streaming

The company is midway through switching to native HTML5 streaming for its laptop players, eliminating Silverlight downloads and “improving the consumer proposition” with a smoother playback experience and longer battery life. This has been a “successful four-year effort to get strong DRM integrated into the major browsers.

Set-top Boxes

Using the same techniques Netflix developed to get on hundreds of different Blu-ray players and Smart TVs, the company is now able to support a “wide variety of MVPD set-top devices with an outstanding and updatable applcation.” The Virgin/TiVo architecture was Netflix’s first, which is a “fairly modern” system. The service has since expanded to less high-end systems.

Personal Recommendations

Netflix has continued to improve its various recommendations systeims, which “match users to content based upon their preferences.” The company has rolled out a new visual searchfeature on the website and on mobile, which includes suggested viewing possibilities for searches that come up empty.

HBO

Since 2011, Netflix has said that HBO would “be our primary long-term competitor,” particularly for content. The competition “will drive us both to be better.” It was “inevitable and sensibe” that they would eventually offer their service as a standalone application. Many people “will subsscribe to both Netflix and HBO since we have different shows,” so we think it is likely we “both prosper as consumers move to Internet TV.”

DVD

The company’s DVD-by-mail service in the US continues to delight about six million members, adding $89 million in contribution profit in Q3. Netflix anticipates a figure “close to the same” in Q4.

Operating Income

Operating income nearly doubled year-to-year to $110 million depsite Netflix’s investmetn in international expansion. To support this expanion, the company’s invested in personal growth. Also contributing to the sequential increase was an increase in legal fees and one-time costs realted to the launch of Netflix’s new markets.

Source: Netflix

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