Netflix Beats Its Conservative Guidance; Still Pricey

Segment contribution margin came in above our projections as the firm pushed out some of its content and marketing spend into the fourth quarter. Despite the shift, the free cash flow loss for the quarter was $859 million, raising the loss for the year to $1.705. We are retaining our narrow moat rating and our fair value estimate of $120 as we project that the firm faces increased competition over the next five years, necessitating an ongoing cash burn and curtailing the speed of margin expansion.

Revenue of $4.00 billion came in line with our $4.06 billion estimate. Netflix posted stronger-than-expected subscriber growth in both the international (6.07 million net adds versus guidance of 4.45 million) and U.S. segments (1.00 million net adds, versus guidance of 0.70 million). Netflix continues to expand its streaming base, ending the quarter with more than 130.42 million global paid subscribers, up from 104.02 million a year ago.

Domestic streaming monthly revenue per paid member came in at $11.44, up 13% year over year and flat sequentially. For international streaming, revenue of $1.97 billion was slightly below our $2.04 billion estimate as monthly revenue per paid member came in at $9.27, up 6% year over year but down 4% sequentially. While the segment contribution margin of 28.8% outperformed our projection by 232 basis points, operating margin of 12.0% came in much tighter to our 11.7% expectation. The firm continues to ramp its R&D and G&A spend, limiting leverage of these categories.

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