Three Big Takeaways:
1) Net Subscriber Addition Growth – Netflix reported net subscriber guidance 32% better than their guidance and even surpassing our aggressive estimates by 3%. As we noted in our past two notes, we expected net subscriber additions to blow past the low guidance Netflix set for itself and that the stock would likely surpass all expectations for it.
2) U.S. Price Increases Combined with Strong Net Subscriber Add Guidance – In terms of guidance, U.S. revenue and total paid members imply that Netflix is expecting well over a 6% Q/Q increase in average revenue per subscriber in Q1. This would be the highest increase since September of 2016 when Netflix saw 0.4 million net subscriber additions that quarter versus the 1.45 million guide for Q1/18. Higher pricing and impressive subscriber growth implies Netflix growth is materially more robust than it was 18 months ago.
3) Netflix is targeting an EBIT margin target of 10% after reporting a 7.2% operating margin in 2017. 2017 EBIT already grew from $422 million in 2016 to $839 million in 2017 so another uptick is impressive.
Other details on the net subscriber additions beat – Net subscriber additions were 8.334 million versus our estimate of 8.124 million and guidance of 6.3 million. Net subscriber additions are a key statistic for investors in attempting to model NFLX on a Discounted Cash Flow (DCF) basis. With their trailing P/E Ratio over 200x and negative free cash flow, future earnings and free cash flow is key to a fundamental valuation.
Q1 guidance is above our estimate but it is still early – Q1 guidance for net subscriber additions is 6.35 million versus our estimate of 5.0 million. We will be revising our estimate once more information regarding Originals is available and our surveys on Churn is completed.
Netflix remains in a class with NVIDIA as the only large ‘tech’ companies able to raise prices and still see an increasing demand for its product(s).
Versus our estimates, sales were slightly worse, gross margin slightly better, and $0.41 EPS match our estimates – The company reported revenue of $3.29 billion, in line with its guidance of $3.27 billion, and within 2% of our estimate of $3.35 billion. Gross margin of 35.9% beat our estimate of 35.2% while adjusted EBITDA margin of 9.5% fell short of our estimated 10.2%. The biggest changes versus our forecast were lower content costs being allocated to the period as well as aggressive marketing spending, up 47% Y/Y. Fully diluted EPS of $0.41 was in-line with our expectations and guidance.
The table below summarizes the above-mentioned metrics.
EXHIBIT 1: Q4 Results and Q1 Estimates
Source: Perspectec, Company reports and Thompson One
Our regression model again closely tracked Global net subscriber additions – Our multiple regression model forecasted 8.12 million Global net additions vs 8.33 million actual net additions. As mentioned in our previous report and affirmed by the management, the strong additions for the quarter have been driven by the success of returning shows and franchises such as Stranger Things season 2, Black Mirror season 4, The Crown season 2 and Marvel’s The Punisher. The quarter also saw the release of many local language Originals such as Suburra (Italian), Dark (German), Club de Ceurvos season 3 which would have played an important role in pushing net International subscriber adds towards the 6.36 million. While our model under-rated the success of ‘Bright’, we believe the impact will be better felt in Q1 2018 net subscriber additions due to its late December release.
SaaS Metrics and Valuation – As a result of the increasing Gross Margin and our assumption of improving global churn (from 26.8% to 26.6%), the CLTV Added TTM/ CGC TTM has increased from an expected 0.42x in Q3 to 0.61x in Q4. Sales and marketing costs in the U.S. were up 52% versus last quarter which were already a near-term high A figure of 1.0x means that the lifetime value of a customer being added is equal to the R&D and sales and marketing costs associated with that customer.
We are currently conducting a U.S. churn survey, and plan to update our SaaS Metrics once this is complete. See the valuation section for details.
Exhibit 2 – Perspectec’s Valuation vs. Share Price Performance
Source: Perspectec
Conclusion – We believe investors should buy the shares up until either our price target or until Q1 results are released.
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
