Netflix Q4 earnings preview: A clash of content and cash

Following a highly volatile year when the market cap see-sawed between $90 billion and $180 billion, Netflix (NFLX) is reporting its fourth-quarter earnings results on Thursday, January 17 after market close.

Wall Street projects earnings of 25 cents per share on revenue of $4.21 billion. In the year-over period, the streaming giant reported earnings of 41 cents per share on a top-line of  $3.29 billion. However, these figures are of little interest to Netflix investors, who view subscriber additions as the company’s key metric.

Netflix ended Q3 with 137 million global subscribers, with almost 57% of it coming from outside the US. In the fourth quarter, the company had projected net addition of 1.8 million subscribers in the US and 7.6 million subscribers in the international markets. The overall subscriber gain projection of 9.4 million is a big jump from the 8.3 million gain achieved in the same quarter last year.

Though Netflix continues to be a dominant force in the streaming space, investors remain concerned about how the market equations might change with the entry of some new players – primarily from Disney (DIS) and Apple (AAPL).

While better-than-expected subscriber additions might spur a quick stock rally, the company’s outlook on future membership growth would be the ultimate factor deciding long-term investor confidence.

Cash burn and the company’s debt obligations are the other factors that could have an impact on the stock movement. Netflix’s incredible success in producing quality shows and movies, in English as well as in foreign languages, have come at a heavy cost.

Netflix’s projection for content spend in the whole of 2018 is $13 billion, more than double of what was earmarked for the same in 2017, weighing heavily on its margins.  Meanwhile, the company had earlier announced that its operating margins during the fourth quarter might decline from 7.5% to 5% due to an increase in original movie releases, where, unlike the case of shows, much of the expenses are incurred at the time of the actual release.

The Scotts Valley, California-based streaming company’s content obligations at the end of third quarter rose to $18.6 billion.  The debt burden is unlikely to get slashed this year when content costs are likely to be around $10 billion.

A quick look at analyst recommendations on Netflix (NFLX) stock

It’s true that the investments are going into successful shows such as Bird Box and Christmas Chronicles, both of which had a record number of streamers. But operating cash flow at the end of the third quarter was at negative $690 million. Netflix’s strategy of raising membership fees in some markets to improve liquidity has backfired with many customers switching to cheaper alternatives. Hence, if there is no alternative strategy to combat the rampant cash burn, investors may soon turn rogue.

Earlier this month, the company appointed Spencer Neumann, a former Activision Blizzard (ATVI) executive, as its CFO. Neumann will be tasked with putting a cap on the cash outflow as well as keeping a tab on the company’s debt load.

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