The Positives
+ Increasing subscriber momentum driving revenue growth. 4Q23 ended on a high, with 260mn paid memberships (13% YoY). Subscriber growth momentum increased for a 4th straight quarter. NFLX also added 13.1mn paid memberships (vs. 8.9mn est.) in the quarter, the most in 4Q. We believe the outperformance was driven by NFLX capturing price-sensitive consumers with its lower-priced ad-tier. Moving into FY24e, we expect revenue growth to be supported by: 1) membership growth of 8% YoY; and 2) 3% YoY ARM growth due to a combination of price increases and scaling of its advertising business.
+ Ads business scaling well; laying the ground work for future margin expansion. NFLX continues to scale its ads business well, with 70+% QoQ growth in the last 3 quarters. It has 23mn users on its ads tier, with 40% of new paid memberships opting for the cheaper subscription. Scaling its ads business is important because advertising revenue remains a long-term margin expansion opportunity for the company. However, we only expect advertising to contribute more meaningfully to revenue as it reaches scale in FY25e.
+ Raising margin expectations for FY24e and beyond. NFLX raised its FY24e operating margin guidance by ~150bps from a range of 22-23% to 24%, indicating a sharp ~340bps increase vs 20.6% in FY23. This expectation reflects: 1) FX tailwinds vs FY23; and 2) better-than-expected 4Q23 subscriber additions combined with price increases flowing into FY24e. Moving beyond FY24e, NFLX also expects to steadily improve margins YoY through a combination of price increases and advertising revenue growth.
ARM (Average Revenue Per Membership): Streaming revenue divided by average number of streaming paid memberships during a given period.
The Negative
- Nil.
The Positives
+ Most membership additions in a quarter since 2Q20. NFLX added 8.8mn new members to its platform, the most in a quarter since 2Q20, and the most for a 3Q in 6 years. A bulk of this was attributed to the success of NFLX’s Paid Sharing program as it converts password borrowers into paying members. There is also an expectation for incremental membership additions from Paid Sharing to continue into the next few quarters, alleviating concerns on near-term growth. NFLX ended the quarter with 247mn paid memberships (11% YoY growth).
+ Guiding acceleration in revenue growth for 4Q23e; margins to also expand moving into FY24e. NFLX issued very encouraging guidance for 4Q23e, with revenue growth accelerating to 11% YoY on the back of growing paid memberships and increasing monetisation. Additionally, the company expects FY23e operating margin to be at the top end of their 18%-20% range, with further margin expansion into FY24e by another 200bps. FY23e Free Cash Flow (FCF) was also increased by US$1.5bn to US$6.5bn – supported by healthier cash flow generation and ~US$1bn in lower content spend due to writer/actor strikes.
+ Price hikes in developed markets continue to show pricing power. NFLX announced that it would be raising prices for some of its subscription plans in the US/UK/FR. In the US, its basic plan will see a price increase of US$2 to US$11.99, while its premium plan will be costlier by US$3 at US$22.99. With the price adjustments, churn rates are still expected to be relatively low – in-line with similar adjustments in the past, and should immediately benefit the company’s bottom-line. This is the first price hike for NFLX in >18 months.
The Negative
- Nil.
The Positives
+ Key initiatives showing positive results. NFLX’s new Paid Sharing initiative has almost fully taken off and is now implemented in >100 countries (>80% of total revenue contributions). Initial results have been positive, revenue and membership numbers are better now vs prelaunch. Paid membership growth was broad-based, with all regions gaining at least 1mn new members. Most of NFLX’s revenue growth was attributed to Paid Sharing, with the expectation of a gradual positive business impact in the near term as borrowers continue to convert over the next few quarters. Paid memberships for NFLX’s ad-supported plan is also ramping up, with memberships doubling from 1Q23 to 2Q23. Revenue from this plan is still marginal, but each ad-supported member is margin accretive.
+ Positive guidance for 3Q23e with revenue growth expected to accelerate to 8%. After 3 consecutive quarters of relatively flat growth, NFLX guided to slightly more positive revenue growth of 8% YoY for 3Q23e, citing increasing monetization from its Paid Sharing initiative and advertising growth. Growth is expected to further accelerate into 4Q23e as more account borrowers convert into paid memberships.
The Negative
- Writer/Actor strikes a temporary positive for margins. Hollywood actors and writers continued to go on strike after failing to reach an agreement with major studios and streaming companies over better compensation and job security. Although this cast some negative publicity for streaming companies like NFLX, the strikes actually benefitted the company’s financials for the quarter. Operating margins beat guidance by 17%, coming in at 22.3% for 2Q23, as the strikes delayed planned content spend into future quarters.
The Positives
+ Revenue growth remained resilient at 4% YoY, in-line with guidance. Netflix generated US$8.16bn in revenue for 1Q23 (4% YoY, 8% YoY constant currency), in line with its guidance, and our estimates. Growth was supported by a 5% increase in membership base (232.5mn) as the company added 1.8mn new members onto its platform. Asia was the main growth driver, with memberships increasing 17% YoY to 39.5mn, offset by a 13% decline in prices due to a combination of price cuts and FX headwinds. Earnings were also roughly in line, with EPS of US$2.88 vs guidance of US$2.82.
+ Operating metrics improving, within expectations. Netflix continued to operate within expectations. Operating Income of US$1.7bn beat its own guidance by 5% as a result of better expense management. Operating margin of 21% was also slightly above guidance – led by incremental margin expansion from advertising, with profit from its ad-supported plan better than that of Netflix’s standard plan in the US. The company reiterated FY23e operating margin to be in the 18-20% range (FX neutral basis), and also increased FY23e FCF guidance by US$500mn to US$3.5bn due to increasing operating leverage.
The Negative
- 2Q23e revenue guidance disappoints, indicating decelerating topline growth. Netflix issued a muted 2Q23e revenue guidance of US$8.2bn (3.4% YoY), representing a decline in topline growth. There are several reasons for this: 1) delay in launching its paid sharing initiative from late 1Q to 2Q, shifting revenue benefits into 3Q23e; 2) higher mix of membership growth in lower monetization regions, reducing overall prices; 3) expected FX headwinds to continue in APAC. The company also expects 2Q23e net additions similar to 1Q23 levels.
The Positives
+ Netflix continues to grow its subscriber base. Netflix looks to have worked through most of its subscriber challenges from 1H22 as the company reported 7.7mn membership additions for 4Q22, 3.2mn more than it guided, increasing for a 2nd straight quarter. Most of the growth came from EMEA, with 3.2mn additions, followed by LATAM and APAC which both contributed 1.8mn additions. Membership additions were supported by a strong schedule of content released in 4Q22, and positive incremental benefits from the new ad-supported plan.
+ “Basic with ads” plan showing early signs of promise. Netflix’s new ad-supported plan, dubbed “Basic with ads”, continues to show strong user engagement trends similar to the company’s non-ads plans, with solid growth trends, and lower-than-expected switches from higher premium plans. Additionally, early signs indicate that the unit economics of Basics with ads remains very strong and should generate incremental revenue and profits moving forward, although this impact would remain relatively modest in FY23e as Netflix continues to gradually roll out this plan to more regions.
+ US$1.6bn positive FCF showing improvements in operating efficiency. Netflix generated US$1.6bn in FCF for FY22, compared with -US$159mn in FY21. Content spend also moderated in FY22, down about US$900mn YoY, with the company building operating leverage from more disciplined content spend. Netflix also guided at least US$3bn in FCF for FY23e as it focuses on growing higher-margin ad revenue, and launching its paid sharing program which aims to reduce the leakage of revenue from users who share accounts outside a specific household. Operating income was US$220mn above company guidance as a result of higher-than-expected revenue, and slower-than-expected hiring.
The Positives
+ Outperformance in membership additions. Netflix reported 2.4mn membership additions for 3Q22, 1.4mn more than it guided. APAC was the main driver of this, growing paid memberships 23% YoY, and contributing 1.4mn additions for the quarter. The outperformance of membership additions was a surprise given the high levels of inflation and a weaker macroeconomic environment. It also comes as a welcome relief after 2 consecutive quarters of membership losses, signalling a potential turnaround in membership growth.
+ 3Q22 beat on both revenue and earnings. 3Q22 revenue of US$7.93bn beat guidance marginally by 1% as a result of outperformance in membership additions offset significantly by FX headwinds. Revenue from UCAN grew 11% YoY, driven mainly by a 12% YoY growth in prices. APAC grew 7% YoY, impacted by a 12% FX headwind. Earnings of US$3.10 also beat guidance by 45% on the back of higher revenue, an estimated US$200mn shift in spend from 3Q22 to 4Q22, and a US$348mn FX remeasurement of the company’s EUR debt. Excluding FX remeasurement, earnings would have beat by around 15%.
+ Strong initial demand from advertisers for new ad-supported plan. Netflix announced that it would be rolling out the much anticipated ad-supported subscription plan to 12 countries this coming Nov at a US$6.99 price point – several months ahead of schedule. Netflix also stated that initial demand from advertisers was very strong, with advertising inventory almost sold out. The company expects this new plan to be margin accretive, and should lead to significant incremental revenue and profit moving forward. The plan is also expected to be neutral to positive on unit economics compared to the existing basic plan.
The Negatives
- Stronger US dollar expected to hurt top and bottom-line growth in 4Q22e. We expect the continued appreciation of the US Dollar relative to most other currencies to continue hurting Netflix’s revenue growth by about 9% in 4Q22e, especially with most of its growth coming from outside the US. We also expect this to affect Operating Margins by about 4%.
The Positives
+ Lower than expected subscriber loss. Netflix reported a subscriber loss of only -0.97mn, compared to its estimates of -2.0mn, suggesting that fears of a declining macroeconomic environment were exaggerated. The company also guided to a healthy 3Q22e with 1.0mn net additions, bucking the trend of losing subscribers over the last 2 quarters, and putting the company back on the growth track.
+ Guidance of ~US$1bn in FCF for FY22e. Netflix also guided to about US$1bn in free cash flow for FY22e (assuming no material FX fluctuations) – compared to -US$159mn in FY21, with further substantial FCF growth in FY23e vs FY22e. This is largely due to the company’s increasing profitability, and stabilization in content spending as they transition further into producing more original content (60% of content assets are now Netflix-produced).
+ Partnering with MSFT to develop ad-supported subscription tier. In line with the company’s proposal of rolling out an ad-supported plan mentioned during their 1Q22 earnings call, Netflix has partnered with Microsoft as their technology and sales partner due to their complementary technical know-how and go-to-market capacity which Netflix can leverage when they roll out their new ad-supported subscription tier in early FY23. This move would allow Netflix to generate additional higher margin advertising revenue, and increase its bottom-line margins moving forward.
The Negatives
- Strengthening USD continues to hurt top and bottom-line growth. We expect the continued appreciation of the US Dollar relative to most other currencies to continue hurting Netflix’s revenue growth by about 3-5% in 3Q22 – ~60% of its revenue comes from outside the US, with the majority of its expenses denominated in US Dollar terms.
Outlook
NFLX recorded 2Q22 revenues of US$7.97bn – slightly below its guidance of US$8.05bn, because of higher-than-expected FX headwinds offsetting lower-than-expected subscriber loss. Earnings beat on a US$305mn non-cash unrealized gain from an FX remeasurement of its Euro denominated debt. The company continues to efficiently manage expected subscriber churn from its price increases across most regions in 2Q22.
APAC continued to be the bright spot for the company, with constant currency revenue growth of 23% YoY, adding 1.1mn new subscribers. LATAM followed suit, surpassing US$1bn in quarterly revenue for the first time, supported by a constant currency ARM growth of 15% YoY.
NFLX guided to only 1mn paid net additions in 3Q22e, vs 4.4mn a year ago, citing ongoing macroeconomic factors and increasing competition as some of the reasons for this. However, this number is still about 2mn more additions compared to 2Q22. The company also guided YoY revenue growth to be around 5% (12% YoY in constant currency), as they consider headwinds from a strengthening US Dollar. Operating margin is expected to be around 16% (20% in constant currency).
We expect 2H22e to be slightly better than 1H22 in terms of net additions, especially due to the seasonality of the company’s content release schedule, as well as moving further away from the negative effects of Russia/Ukraine conflict. We expect margins to also remain fairly stable on a constant currency basis and are positive on NFLX’s ability to manage its content spending moving forward, and its forecast for exponential FCF growth in FY22e and beyond. We believe that the company’s continued focus on producing quality content, while also attempting to reduce revenue leakage through password sharing and increasing margins via a new ad-supported subscription tier, should set the company up for higher payTV penetration and market share moving forward. Secular tailwinds remain intact, with NFLX accounting for 7.7% US TV market share in June 22, up almost 1% from 6.8% in May 22.
The Positives
+ EPS beat company guidance by 23%. NFLX reported EPS of US$3.53, handily beating its own guidance of US$2.86 by 23%. The main reason for this were the effects of subscription price increases in several parts of the world that boosted net margins to 20.3%, compared to guidance of around 17%.
The Negatives
- Slowing revenue growth. NFLX recorded revenue of US$7.87bn in 1Q22, slightly below its expectations of US$7.9bn, representing a 2%/10% QoQ/YoY growth respectively. YoY growth has been declining steadily each quarter, with NFLX pointing to: 1) relatively high household penetration rates; 2) large number of shared accounts amongst multiple households; 3) increased competition, as headwinds for revenue growth.
- Negative paid net additions for 1Q22. NFLX recorded negative paid net additions for 1Q22, and this is the first time the company has lost subscribers for a quarter in almost 10 years. The company mentioned macroeconomic factors like slowing economic growth, increasing inflation, the Russia/Ukraine conflict, and increased competition as reasons for the negative paid net additions. NFLX lost 0.7mn subscribers from Russia as it suspended services due to the ongoing conflict. APAC was the only region with positive paid net additions of 1.0mn.
- Weak guidance for membership growth in 2Q22. NFLX guided to a 2.0mn loss in paid net additions for the 2Q22, citing slowing acquisition, a negative short term impact due to price increases, and typical seasonality weakness of 2Q compared to 1Q, as reasons for the guidance. However, the company still expects additional revenue generated from recent price increases to offset revenue loss from membership contraction, and guided to a YoY revenue growth rate of around 10% for 2Q22.
The Positives
+ Revenue for 4Q21 showed strong growth. NFLX reported revenue of US$7.7bn for 4Q21 – 16% YoY, slightly above our estimates of US$7.5bn. The company also reported FY21 revenue of US$29.7bn – up 19% YoY, slightly above our estimates of US$29.5bn, led by increases in memberships as well as subscription prices.
+ US$1.33 EPS outperformed consensus estimates of US$0.82. NFLX’s EPS of US$1.33 for 4Q21 beat consensus estimates by 62%, largely due to increasing net margins, and a US$104mn non-cash unrealized gain from an FX re-measurement of the company’s euro- denominated debt. EPS for the year was US$11.24, an 85% YoY increase from FY20.
The Negatives
- Weak 1Q22 guidance for paid net additions. NFLX provided relatively weak guidance of 2.5mn net paid additions for 1Q22 vs 4mn in 1Q21. The company attributed this to a continued overhang from COVID-19, a more back-end slated release schedule, as well as macroeconomic strains in the Latin America region.
- Expected revenue loss of US$1bn in FY22e due to strengthening of US dollar. NFLX expects the strengthening of the USD in relation to most other currencies during 2H21 to impact FY22e revenue negatively by US$1bn, representing almost 3% of FY22e revenue. Almost 60% of total revenue is expected to be generated outside of the US, and most of the company’s expenses are within the US, making NFLX susceptible to FX fluctuation risks. In addition, the company does not hedge against this.
Performance
Overall, NFLX’s 4Q21 performance slightly exceeded our 4Q21e forecasts, with outperformances in several areas like net margin (7.9% vs 4.9%) and EPS (US$1.33 vs US$0.81). Paid memberships and paid net additions were slightly below our expectations, but not by much (Figure 1).
The Positives
+ Paid membership additions above company estimates for 3Q21. 4.4mn paid net membership additions a 99% YoY increase compared to 3Q20, almost 1mn more than the company’s projection of 3.5mn, most of the net additions came from EMEA and APAC region. The uptick in membership growth was due mainly to big hits like “Squid Game” and “Money Heist”, which brought in record viewership numbers.
+ Subscription price hikes boosting revenue. Increasing membership base and price boosted 3Q21 revenue to US$7.5bn, a 16.3% YoY growth. Average Monthly Revenue per Membership (ARM) ended 3Q21 at US$11.80, representing an 8% growth YTD, on track to hit our estimates of 10% growth by end FY21e. Primarily due to price increases in the LATAM region.
+ Strategic acquisitions to boost content creation. We believe that selective acquisitions in the Roald Dahl Story Company and Night School Studio – video game developer, will boost its IP library for future content, as well as to improve its gaming capabilities to ramp up production of mobile video games.
The Negatives
- Softer QoQ guidance for EPS and PATMI in 4Q21. NFLX guided to a weak 4Q21 PATMI of US$365mn (-75% QoQ), led by a sharp increase in content costs due to a packed content release schedule. EPS is expected to be US$0.80 for the quarter. Nevertheless, guidance is above our estimates.
Average Monthly Revenue Per Membership (ARM) is defined as the total revenue for a given period divided by the average number of paid memberships at the beginning and end of that particular period.
Outlook
In terms of revenue, 4Q is seasonally the strongest quarter of the year, with strong growth in paid memberships and ARM. 4Q21 should be no different, especially with this season's scheduled introduction of new quality content, and price hikes. We expect to see a relatively large content slate arriving in 4Q21, after lighter 1Q and 2Q content slates due to Covid related production rollovers in FY20.
Revenue is expected to be strong for 4Q21 at US$7.7bn, but PATMI for the quarter to be significantly lower than any other quarter in the year due to increased content cost, leading to lower net margins. 4Q EPS and PATMI is typically weaker than the rest of the year due to higher content costs associated with higher volume of content releases.
NFLX guided 4Q21 to YoY declines in PATMI from US$542mn in 4Q20 to US$365mn in 4Q21. The significant drop in guidance is due to a higher than usual expectation in content costs, causing net margins to decrease YoY as well.
