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Why Netflix’s Earnings Plunged in the Fourth Quarter

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A profit of $134 million

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.

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Netflix’s operating margin narrows

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.

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