Online video streaming giant Netflix, Inc. (NASDAQ:NFLX) is always full of surprises, whether it’s fending off activist investors or suddenly raising prices 60%. The company surpassed its most recent sell-side EPS estimates by a huge margin, and shares are up roughly 70% after its latest earnings. In addition to silencing a lot of naysayers, the firm answered a lot of key questions regarding its future strategies. Alongside more surprises, the company has a rock-solid future ahead.
Strong growth across the board
Netflix’s Q4 numbers were extremely impressive all around. The company now has more than 33.3 million global streaming members. In Q4, it added 2.05 million new subscriptions in the U.S. and 1.81m subscriptions in International markets.
Revenues are up 7.4% Y/Y to end at $945 million, and the company rolled out an unexpected profit of 8 milion. Also, the contribution margin in the U.S. was up by 2.1% to hit 18.5%. The DVD business continues to scale down, but at a lower-than-expected rate. However, margins in the DVD business will take a hit from the increased USPS mailing rate of $0.01 each way, which went into effect earlier this month.
Increased tablet and smart TV adoption
Increased tablet and smart TV adoption during the holidays provided additional tailwind for subscriber growth. As manufacturers place more and more Netflix buttons on smart TVs, the service's subscription additions get a big boost. High customer satisfaction led to more word-of-mouth marketing, which aided in trimming down the company's marketing budget. In addition to its low cost, Netflix’s ubiquitous accessibility is also a big value proposition for the company. Deeper integration with gaming consoles, Smart TVs and Blu-ray players gives Netflix access to millions of new households worldwide.
The 'virtuous cycle' has been paying off
Netflix's business can be summed up as, "Add content, bring in subscribers and revenues, and use the incremental content budget to purchase more content." This business model has been paying off for Netflix thus far, and the company now has nearly 3 million free users in the pipeline, ready to be converted to paying customers in the next quarter
Netflix's mega deal with The Walt Disney Company (NYSE:DIS) doesn't go into effect before 2016, and in the interim, the company continues to license more content. Even though Disney content represented only 2% of Netflix's existing viewership, the addition of titles from big studios like Disney, Pixar, and Marvel will be a huge boost for the company going forward. Netflix also struck a deal with Time Warner Inc. (NYSE:TWX) subsidiary Warner Bros., the largest TV producer in the world, and will add a lot of popular TV shows to its content library.
Service differentiation with original content
Netflix is diving into original content, and will be rolling out a number of shows globally throughout 2013. Even though investing in original content may seem like a gamble, success with originals will lead to the production of more original content, and more importantly, enhance Netflix’s global brand value.
The main value of original content comes from its ability to bring in new subscribers and keep the existing ones very satisfied. As the original content will be completely exclusive to Netflix, it will serve as a strong value proposition for potential subscribers.
Competitive threats are overblown
Coinstar, Inc. (NASDAQ:CSTR)- and Verizon Communications Inc. (NYSE:VZ)-powered Redbox Instant is in beta testing, and hasn't seen a major launch yet. But it will appeal to the end-user, since it comes at a similar price point as Netflix, and also allows users to pick up DVDs from the almost 30,000 locations of Redbox kiosks. Another major player is Time Warner's HBO Go; it offers a great user experience, but its price point is much higher, as it is bundled with an HBO subscription.