More on Netflix: margin growth solid, content expenses to be recognized faster

|By:, SA News Editor

Q3 U.S. streaming margin was 23.7%, up 120 bps Q/Q and 450 bps Y/Y, and the division had a contribution profit of $166M (+10% Q/Q and +47% Y/Y). Netflix (NFLX) is guiding for a Q4 margin of 23.2%.

The international unit had a $74M contribution loss in Q3 vs. $66M in Q2 and $92M a year ago, and a $65M loss is expected in Q4. But Q3 net adds totaled 1.44M, beating guidance of 550K-1.25M and raising the size of the international sub base to 9.19M. 900K-1.7M net adds are expected in Q4.

Reed Hastings admits "low quality" free trial promotions in Latin America boosted Q3 international adds, and will pressure Q4 adds a bit.

The DVD sub base fell by 360K Q/Q to 7.15M after declining by 470K in Q2. The business had a $107M contribution profit vs. $109M in Q2.

Going forward, Netflix will amortize original content costs more quickly, due to the fact a large portion of viewing happens shortly after a show launches. Until now, shows were amortized on a straight-line basis over four years or the show's license period (whichever is shorter).

Free cash flow was $7M in Q3 vs. $13M in Q2 and -$20M a year ago. Netflix expects Q4 EPS of $0.47-$0.73, above a $0.46 consensus.

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