Thursday, January 19, 2017

Netflix Is About To Be Bigger Overseas Than It Is In The U.S.

Big international expansion puts Netflix near tipping point for overseas subscribers outpacing domestic.

By Therese Poletti
January 19, 2017

Streaming content giant Netflix Inc.’s bombastic move to expand to 130 countries at once last year has led to big gains in subscribers, capped by a fourth-quarter push that puts the company on the verge of a tipping point that will make its overseas product bigger than its domestic offering.

On Wednesday, Netflix NFLX, +0.28% reported stronger-than-expected fourth quarter earnings, fueled by a big surge in international subscriber growth, sending its shares up 8% to what would be record highs in after-hours trading. Its stock has outperformed the S&P 500 index SPX, +0.18% on a trailing 12-month basis.

Netflix enjoyed its biggest quarter for new customers yet, adding 7.05 million net new members globally in the quarter, easily topping its forecast of 5.2 million. In fact, it added almost as many international subscribers as its total expectations, with an additional 5.12 million people signing up for the service overseas in three months.

In the U.S., where it has a far more saturated customer base, it also showed good growth, adding 1.93 million members in the quarter, exceeding its forecast of 1.45 million, fueled in part by much of its original and exclusive content. At the end of 2016, Netflix claimed 93.8 million total customers, with 44.37 million of those outside the U.S., part of a strong growth year for the company.

Jan Dawson, chief analyst of Jackdaw Research, said in an email that he believes the company’s international subscriber base, which reached 47% of total subscribers this quarter, should outpace the U.S. base for the first time this year.

“International streaming subscribers are likely to pass U.S. subscribers sometime around midyear, perhaps even by the end of the second quarter,” he predicted.

Netflix is now offering locally created shows, in their local language, for specific countries, a move that is adding to costs but also helping it grow outside the U.S. For example, its first Brazilian series, “3%,” premiered as one of the most watched originals in Brazil and played well throughout Latin America, Netflix said. In addition, millions in the U.S. watched the show dubbed and subtitled into English, continuing a trend that Netflix did not expect but has enjoyed.

“We love that we are working with local story tellers, local producers,” Ted Sarandos, the company’s chief content officer, said in the investor interview. “That is really making a big difference.”

While its U.S. streaming and DVD rental business were both profitable, Netflix’s international streaming business saw a net loss of $66.5 million in the fourth quarter, a big narrowing compared with its loss of $108.8 million in the fourth quarter of 2015.

Netflix executives, though, cautioned in their shareholder interview and in the quarterly letter to investors that the international business will still see a net loss—albeit a narrower one—for the full year of 2017, even with a slight operating profit also forecast for the first quarter, as it continues spending on new content for individual geographies and on new market entries.

“We plan on investing over the remaining quarters of 2017 internationally and, as a result, anticipate an international contribution loss in Q2,” Netflix said in its shareholder letter. “On a full year basis, we expect international contribution loss to improve substantially year on year.”

Investors will have to accept these losses for the international business, just as they did when Netflix was building its U.S. offering, but Chief Executive Reed Hastings has proved that he deserves the benefit of the doubt when it comes to spending to build a winner.

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