Netflix is scheduled to release its fourth quarter earnings report tonight, and consensus estimates suggest earnings of 2 cents per share and revenue of $1.83 billion. The earnings number is expected to be extremely low because of all the investments into international expansion, but one warning we would caution investors about is that the company announced that It has added 130 more countries—putting its expansion efforts ahead of schedule.
Netflix to enter China soon?
This might mean a miss on earnings, but missing on the bottom line will probably be less important to investors as Wall Street likely sees sales and subscriber add numbers as being more important. Today shares of Netflix climbed during regular trading hours, although that might have less to do with earnings and more with CEO Reed Hastings’ comments on China.
The country was perhaps the most notable one left out of this month’s report about the widespread expansion. However, Hastings said at the Digital Life Design conference in Germany that they might have a license to operate there soon, reported The Wall Street Journal on Monday. He also said though that it might be “a couple years” before they have it.
1Q subscriber outlook more important than earnings
In a report dated Jan. 18, UBS analyst Doug Mitchelson said he thinks Netflix management’s guidance for first quarter subscriber adds will be the most important number in tonight’s earnings report in light of the massive international expansion in such a short time. The consensus estimate according to StreetAccounts is 2.87 million international net adds for the first quarter, which is significantly lower than the estimate of 3.51 million.
Mitchelson noted that most of the video streaming company’s new markets are “‘skim’ launches,” which means the company offers only limited content that’s often not even in the local language Further, management could guide conservatively because of this fact and because they only have 13 days of results for the quarter so far.
However, he adds that he surveyed many of the new markets and was encouraged by how many of them have “healthy” amounts of English-speaking homes, broadband speeds of more than four megabytes per second, and “healthy” penetration rates for credit cards. As a result, he expects those markets to see better performance. His estimate for the first quarter is 3.8 million net international subscriber adds, putting him significantly ahead of the consensus estimate.
4Q also to focus on subscribers
The UBS analyst also thinks Wall Street will be focusing on subscriber adds for the fourth quarter. His estimate and consensus are in line with guidance. Management guided for about 5.15 million net adds, consensus is at 5.13 million, and UBS is at 5.15 million. Netflix guided for EBIT of $49 million, while the consensus is at $48 million.
Other numbers Mitchelson will be looking at today include international and U.S. margins, content supply, the timing of the China launch, and whether the slowdown in domestic subscriber adds during the second half of 2015 was the result of seasonality, competition or maturation. Also he wants to see how much of an impact recent price increases will have on the churn rate and whether the company can keep growing in the international markets it is already in. He has a price target of $147 per share and a Buy rating on the stock.
Netflix shares climbed by as much as 3.81% to $108 during regular trading hours today.