Just one number matters for Netflix results
The media industry's current mantra is "content is king" but for analysts watching Netflix (NFLX) this week, subscribers are king — more specifically international subscribers.
When Netflix reports third-quarter results Wednesday evening, it's expected to post a 43 percent decline in earnings per share, while sales are forecast to rise 24 percent, but the real story about the state of its global expansion.
The streaming giant has laid down roots in hosts of new markets, most recently Japan in the third quarter, and it plans to expand further into Europe during the fourth quarter. Wall Street will undoubtedly be looking for signs that the expansion is gaining traction.
Analyst are bullish on second-half subscriber growth and the company is widely expected to surpass its guidance of 3.55 million net additions — consisting of 2.4 million additional international subscribers and an additional 1.15 million domestically.
In a research earlier this week, Michael Nathanson, media analyst at MoffattNathanson, said Netflix could add 4.2 million new subscribers, including 1.5 million domestic and 2.7 million international, which would bring the company's total paid subscriber base to a record 67 million.
On average, Wall Street is looking for 1.19 million U.S. net additions and 2.46 million net additions internationally, according to StreetAccount estimates.
"The U.S. has always gotten the focus, in terms of subscriber growth, but we're seeing international starting to become more and more of a factor," said Tuna Amobi, senior media and entertainment analyst at S&P Capital IQ. "I think international is really starting to pay off, especially since they've ramped up the launches in the last 18 to 24 months."
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Netflix's international business has been drag on its profitability as it has increased spending on original content. The company said it expects to generate material profit on the global front in 2017 following "peak international losses" in 2016. The company hopes to be fully global by the end of 2016.
Analysts surveyed by Thomson Reuters expect the Los Gatos, California-based company to post net income of 8 cents a share, a decrease of 43 percent from the same three-month period last year, while revenue is forecast to rise 24 percent to $1.75 billion.
Notably, the company's DVD-by-mail segment, a relic of its original business model, is projected to contribute $74 million in profit, nearly making up for the $77.7 million loss expected from its international streaming business, according to StreetAccount. The dwindling U.S. DVD business served 5.3 million members in the second quarter and provided about $78 million in contribution to profit, while the international steaming segment lost $77 million.
"We've seen more spending on content and I think [earnings] expectations are tempered due to the losses related to the international business," Amobi said, "I think it's going to pay off in terms of viewing hours ... they don't break out viewing hours, but every time they have the trends have been very strong."
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In a note Tuesday, Nomura pointed to Netflix's recent price increases in Europe and the U.S. as evidence of the company's confidence in the "inelasticity of Netflix demand."
"We believe the decision to raise prices in the U.S., Canada and parts of Latin America in 4Q were in part motivated by 3Q's success in Europe and management's overall confidence in the subscriber growth trajectory," Nomura said.
Last week, Netflix increased the price of its most popular streaming plan for new members by $1 to $9.99 per month.
Investment firm Wedbush said the price hikes reflect increasing content costs — as opposed to pricing power.
Netflix is inarguably the streaming market leader, taking about 38 percent of the U.S. video-on-demand market, followed by Amazon (AMZN) with 14 percent and Hulu with 7 percent, according to NPOWER and Nielsen research, which excludes broadband-only subscribers.
The company's growing domination of the streaming market has some traditional media outlets re-evaluating their licensing partnerships with Netflix — which could be a threat to its library of content down the line.
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"Already during the September conference circuit, we have heard some media executives, most notably at 21st Century Fox (FOXA) and Time Warner (TWX), become more vocal against selling content to Netflix, which now has 42 million subscribers in the U.S. and has been labeled the main culprit behind TV ratings declines," Nathanson wrote in a note earlier this week.
Media stocks were battered in August as investors appeared to lose faith as fears intensified about customers scaling back on traditional cable packages after Disney (DIS) trimmed its forecast for TV subscriber-fee profit growth because of subscriber losses at its flagship ESPN sports network.
Traditional cable companies are still worried about cord cutting, but a big pop in Netflix's third-quarter subscriber growth doesn't necessarily mean that cord cutting has accelerated, according to S&P's Amobi.
"Cord cutting is definitely an issue; however I don't think it's such an issue right now to become overly concerned that somehow Netflix is going to dominate the overall television landscape, Amobi said.
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Netflix shares have largely outpaced the wider market, gaining about 125 percent year to date as of midafternoon trading Tuesday, versus a 2 percent gain in the Nasdaq (^IXIC) and 2 percent decline in the S&P 500 (^GSPC).
The company will report third-quarter 2015 financial results Wednesday after the bell. A conference call with Reed Hastings, its CEO, is planned for 5 p.m. ET.
Disclosure: Hulu is a joint venture between Disney, 21st Century Fox and NBCUniversal (CNBC's parent company).
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