Netflix is a much to be admired company. It has changed the way consumers view content and is growing with clear and strong focus on the future.
Netflix has achieved several major milestones in Q1: surpassing 40 million members in the US; 20 million internationally; and 60 million in total. The Company’s original series, documentaries and comedy specials are being enthusiastically received and member engagement is at an all-time high. Members streamed 10 billion hours in Q1, more evidence that consumers around the world are embracing the Internet TV revolution.
The Company added a record 4.9 million new members globally in Q1, against a forecast of 4.1 million and prior year of 4.0 million, bringing the total global streaming membership to 62.3 million. In the US it gained 2.3 million new members, well above the expectation of 1.8 million due to both acquiring and retaining more members than forecast.
Internationally it added 2.6 million members versus a forecast of 2.25 million due to stronger growth than expected across a number of markets. The Company is forecasting Q2 US net adds of 0.6 million, similar to the year ago quarter. During Q1, higher-than-forecast net adds and US revenue coupled with lower-than-forecast content spending, resulted in a US contribution margin of 31.7%, ahead of the 30.1% estimate.
The international segment was fuelled by continued strong growth across 50+ countries as well as a successful March 24 launch in Australia and New Zealand, which adds about 8 million broadband households to the addressable market.
In Australia and New Zealand, Netflix benefited from high consumer awareness, a fervent fan base for original series like House of Cards and Orange Is The New Black and operator relationships with Optus and iiNet, the second and third largest broadband providers. The Company expects international Q2 net adds of 1.90 million, up 70% vs. last year.
The company reported a strong set of numbers and its revenue came in at USD 1.57 billion, up 24% from USD 1.27 billion during the same quarter last year. International revenue has soared from USD 267 million in Q1 2014 to USD 415 million in Q1 2015 — 55% growth in the last year. The strong dollar hurt financial results during the quarter, negatively affecting International segment revenue (lower by USD48 million y/y using Q1 2014 forex rates), which carried through into a USD 15M negative forex impact on international contribution loss.
These forex headwinds offset better than expected subscriber growth to result in contribution losses. Strong performance led to overall operating income (USD 97m actual versus USD 79m forecast). Net income was negatively affected by currency-related transaction losses included in other expense; excluding these forex losses, Q1 EPS would have been USD 0.77 vs. actual EPS of USD 0.38.
During the quarter, free cash flow totalled USD -163 million, a step up from Q4 reflecting growing original content investment. In February, the company issued USD 1.5 billion in debt at a weighted average interest rate of 5.7%, split between 7 and 10 year notes. Netflix ended Q1 with USD 3.0 billion in cash & equivalents and short term investments. The company will continue to invest aggressively in original content which is cash intensive. The plan is to run around break-even globally through 2016, and to then deliver material global profits in 2017 and beyond.