Netflix’s domestic streaming segment
Netflix (NFLX) is expecting revenues of $1.2 billion in fiscal 1Q16, with a contribution margin of 35.9%. The company reiterated in its fiscal 4Q15 letter to shareholders that it expects to be on track to achieve a contribution margin of 40% by 2020.
As the graph below shows, Netflix had streaming memberships in the United States of 44.7 million in fiscal 4Q15. It expects its domestic streaming memberships to be about 46.5 million in fiscal 1Q16 with net additions of 1.8 million members.
However, the company stated in its fiscal 4Q15 letter to shareholders that in fiscal 2Q16 and 3Q16, it expects many of its US subscribers to be released from the grandfathered-in price and have the option to continue at the SD (standard definition) plan at $7.99 per month or move up to the HD (high-definition) plan at $9.99 per month. Since many of Netflix’s grandfathered-in subscribers have been with the company for the past two to three years, the company isn’t expecting a significant churn from the price increase.
Will Netflix be able to achieve its target of more subscribers?
Netflix is facing increasing competition in the United States from the launch of new OTT (over-the-top) services, including Alphabet’s (GOOG) YouTube Red. Traditional television networks are also launching direct-to-consumer services such as Starz’s (STRZA) service priced at $8.99 per month. Other direct-to-consumer services that already exist in the market include Time Warner’s (TWX) HBO Now and CBS’s (CBS) Showtime.
Netflix is trying to counter this competition through a host of original programming and new technological initiatives.
In the next part of this series, we’ll look at Netflix’s new technological initiatives. Netflix makes up 0.87% of the PowerShares QQQ ETF (QQQ), which has a 4.7% exposure to the television sector.