Key drivers of margin outlook
Leading Internet entertainment operator Netflix (NFLX) estimates that its operating margin in 4Q17 will be 7.3% against 6.2% in 4Q16 and 7% in 3Q17.
That growth is mainly attributable to the hike in rates in the US market and strong growth in revenue for its International segment. Continuing growth in paid memberships in the US and international markets has encouraged the company to set bullish operating margin guidance.
From the graph above, we can see Netflix’s operating margin growth in the last five quarters. In 1Q17, it saw its highest margin growth of 9.7%.
Management believes that in 4Q17, Netflix will generate an operating income of $238 million, a staggering 54.5% rise YoY (year-over-year). If it manages to achieve its 4Q17 target, it would be its highest operating income for the last five quarters. It would also exit fiscal 2017 with $832 million of operating income against $379 million in 2016.
Stiff competition could hurt margin growth
In November 2017, Netflix increased its monthly subscription rates from $9.99 to $10.99 for the mid-tier segment and from $11.99 to $13.99 for high-end customers. That, in addition to phasing out its grandfather plans, could lead to an improvement in Netflix’s margins going forward.
Strong growth in total membership could continue to act as a catalyst for margin expansion. The company expects its total user base in 2017 to increase 23% on an annual basis to 115.6 million.
However, Netflix’s margins could be affected by the increased availability of original content from other pay-TV operators such as Amazon Prime Video (AMZN), HBO (TWX), and Hulu. Disney (DIS) plans to directly deliver content to consumers through applications.