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A month has gone by since the last earnings report for Netflix, Inc. NFLX. Shares have added about 6.7% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is NFLX due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Netflix’s first-quarter 2018 earnings of 64 cents per share grew 60% on a year-over-year basis and beat the Zacks Consensus Estimate by a penny. Revenues of $3.701 billion increased 40.4% year over year and came ahead of the consensus estimate of $3.689 billion.
The company added 7.41 million subscribers (1.96 in domestic market and 5.46 in international), much more than the expected 6.35 million, which shows attractiveness of its portfolio to consumers.
Netflix’s focus on international expansion and original regional content paid off, with international subscribers outnumbering the domestic ones.
The first quarter had a strong programming slate, with new seasons of popular shows like Marvel’s Jessica Jones, Grace and Frankie, Santa Clarita Diet and A Series of Unfortunate Events and new releases like The End of the F***ing World and Altered Carbon.
The company’s growing roster of original films is evident from the addition of Benji aimed for kids and family, a comedy named Game Over, Man and a hip-hop biopic called Roxanne Roxanne, to its platform this quarter. Moreover, its acquisition of popular movies and shows like The Cloverfield Paradox and Annihilation helped it attract more customers.
Netflix’s effort to strengthen regional programming is a key growth driver. An original Brazilian series named O Mecanismo and Spanish heist drama La Casa de Papel among others attracted international subscribers.
International Streaming revenues (48.1% of total revenue) soared 70.4% year over year to $1.78 billion.
Domestic Streaming revenues (49.2% of total revenue) improved 23.8% from the year-ago quarter to about $1.82 billion.
However, the DVD business continued to be in trouble, with revenues (2.7% of total revenue) declining 18% year over year to $98.8 million.
Netflix now has 125 million subscribers globally. At the end of the quarter, Netflix's paid streaming members across the globe were 118.9 million, up 26% from the prior-year quarter. The figure is impressive, considering 14% increase in its average selling price (ASP).
In the Domestic Streaming segment, Netflix’s subscriber base (45.4% of total) was 56.71 million, up from 50.85 million in the year-ago quarter. Paid members increased 11.6% from the year-ago period to 55.09 million.
In the International Streaming segment, the company recorded 68.29 million members (54.6% of total) compared with 47.89 million in the prior-year quarter. Paid members were 63.82 million, up 41.8% from the year-ago quarter.
Consolidated contribution profit margin (revenues minus the cost of revenues and marketing cost) was 27.7% compared with 26.9% in the year-ago quarter.
Consolidated operating income grew 73.8% year over year to $446.6 million. Consolidated operating margin increased 230 basis points (bps) to 12.1%.
Netflix had $2.599 billion in cash and cash equivalents as of Mar 31, 2018 compared with $2.823 billion as of Dec 31, 2017.
Cash used in operations in the quarter was $236.76 million compared with $487.96 million used in operations in the prior quarter. The company reported free cash outflow of $286.5 million.
For the second quarter of 2018, management forecasts earnings of 79 cents per share.
Domestic and international streaming revenues are expected to be $1.898 billion and $1.943 billion, respectively. Total streaming revenues are expected to be $3.841 billion while total revenues, including the DVD business, are anticipated to be $3.934 billion.
Management expects to add 1.2 million subscribers in the domestic streaming segment and 5 million subscribers in the international segment, which is a bit conservative compared with the past quarters.
The company forecasts operating margin of 12% for the second quarter and targets 10-11% for fiscal 2018.
Netflix reiterated its content expense estimate for this year in the range of $7.5-$8 billion.
The company continues to expect free cash outflow in the range of $3-$4 billion for 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been 14 revisions higher for the current quarter. Last month, the consensus estimate has shifted by 24.3% due to these changes.
Netflix, Inc. Price and Consensus
Netflix, Inc. Price and Consensus | Netflix, Inc. Quote
At this time, NFLX has a subpar Growth Score of D, however its momentum is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, NFLX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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