uploads///Netflix operating loss in international markets

Netflix Continues to Expand in International Markets

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Netflix continues to add new countries

In the first part of this series, we discussed Netflix’s (NFLX) better-than-expected 1Q15 earnings results. Its new member additions beat its own estimates in the US and international markets. Netflix credited the new member growth in the international markets to its increasing reach.

Netflix had a successful launch in Australia and New Zealand in March this year. It also struck relationships with the second and third largest broadband providers in New Zealand—Optus and iiNet.

Netflix coped well with the increasing competition in international markets. A few months ago, Netflix mentioned that Time Warner (TWX) has been aggressive in marketing its HBO Go service in Nordic countries. However, Netflix is still well ahead of HBO Go.

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Netflix operating losses widened

Netflix started its international operations in Canada about five years ago and now provides its service to 50+ countries. In Canada, Netflix struck a multiyear licensing deal with Walt Disney (DIS) for providing exclusive content for consumers to watch online. Netflix expects another main launch in Japan (EWJ) later this year.

However, rapid expansion in international markets means Netflix continues to make operating losses in these markets. As the above chart shows, Netflix’s operating loss increased from $35 million in 1Q14 to $65 million in 1Q15. Netflix expects this loss to widen further to $101 million in 2Q15.

Netflix launched its service in France and Germany about six months ago. However, expansion in Europe (EFA) affected Netflix’s margins. Due to a change in European law, Netflix has to pay higher VAT (value-added tax) to the European government starting this year. Netflix decided to absorb these costs and not pass them to its customers. This was another reason why its margins declined internationally.

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