Why Netflix’s Earnings Plunged in the Fourth Quarter

Netflix’s (NFLX) continued content and marketing investments have subdued its net profits. In last year’s fourth quarter, its net income fell YoY (year-over-year) to $134 million ($0.30 per share) from $186 million ($0.41 per share).

Netflix launched several new titles in the holiday quarter, increasing its production costs and squeezing its margins. Also, a closer look at its fourth-quarter financial reports indicates that its marketing costs rose by a whopping 56.6% YoY to $2.7 billion.

Netflix’s operating margin narrowed YoY in the fourth quarter to 5.2% from 7.5%, and sequentially from 12%. A good chunk of the company’s revenue is international, meaning foreign exchange can affect it. The US dollar’s strength last year was a headwind.

Additionally, Netflix’s higher expenses dragged down its earnings YoY. This year, the company expects its operating margin to expand YoY to 13% from 10%.

The markets do not seem to be valuing Netflix based on its earnings yet. However, despite its negative free cash flow, the company has maintained profitability.