Netflix Inc. – Healthy start to the year


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.

Netflix Inc. Focusing on margin expansion



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.

Netflix Inc – Re-acceleration in membership growth





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%.

NETFLIX INC. – Turning corner on negative growth

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.



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.

NETFLIX INC. – Shifting efforts into higher monetization

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.

NETFLIX INC. – Strong performance overshadowed by weak guidance



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.



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).

NETFLIX INC. – Membership growth boosted by hit series

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.



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.

NETFLIX INC. – Scaling to higher margins and cash flow

Investment Merits

  1. A continuing trend of positive net paid additions. NFLX ended FY20 with 204mn paid memberships, a 22% YoY increase from FY19. Paid memberships increased 23% CAGR over the past 4 years (Figure 1) , or 27mnnet additions per year. We expect growth in paid memberships to dip slightly in FY21e to 9%, largely due to tougher pandemic comps last year. Average Monthly Revenue per Membership (ARM) or prices has also been trending upwards from FY16 to FY20 (Figure 2). We forecast ARM to increase 10% YoY FY21e, led by subscription price hikes in UCAN and EMEA regions. 1H21 ARM increase was 7%. We expect PATMI to grow 62% YoY in FY21e, led by increases in both paid membership volume and subscription pricing.


  1. Expanding net margins and positive FCF for the first time. Net margins for FY20 were 11%, up 2% from FY19. The expanding net margins are due to NFLX’s fixed-cost structure where most of their costs – content costs, are incurred upfront regardless of the number of memberships. As a result, costs for acquiring new users continue to decline and therefore enjoy scale. Content cost as a percentage of revenue has collapsed significantly over the last 4 years from 98% in FY16 to 47% in FY20. Figure 4 illustrates this as we see ARM continue to increase even as content cost per membership remains flat. NFLX enjoyed maiden positive FCF for the first time in FY20, on the back of reduced content spend. We are buoyed by NFLX’s guidance for breakeven FCF in FY21e, allowing the company to finally self-fund its growth. We also view this as a significant milestone for the company as they turn the corner on profitability.


  1. Enormous potential for growth with only 20% household penetration globally. It’s currently estimated that NFLX is only about 20% penetrated in the 800-900mn broadband or pay TV households globally, which gives it substantial runway for growth. – shifts in consumer behavior away from linear television to video on demand (VOD) streaming entertainment also provide additional tailwinds for penetration. Additionally, there is a robust global mobile broadband market that NFLX can further address as a secondary channel for distributing its services – particularly for customers that do not have broadband or pay TV at home. NFLX is also in the incubation stage of developing a new avenue of content – gaming, to complement its existing streaming experience.

We Initiate coverage with an ACCUMULATE rating and target price of US$724.00 based on DCF valuation, with a WACC of 9.0% and terminal growth of 3%.



NFLX’s revenue for FY20 was US$25bn, 99% is derived from monthly membership subscriptions paid by customers for their streaming services. Revenue increased 24% YoY, bolstered by 22% growth in paid memberships. Gross profit came in at US$9.7bn, with PATMI of US$2.8bn.


Geographical Breakdown: UCAN (US + Canada) comprises 36% of global paid memberships, totaling 74mn memberships in end FY20 (Figure 5). We expect growth to slow significantly in this region to about 2% YoY, due to 1) increased competition from Disney+ and HBO Max, 2) re-opening headwinds for new subscribers.

EMEA (Europe, Middle East & Africa) and LATAM (Latin America) make up 33% and 18% of global paid memberships respectively, we expect paid membership growth in these regions to increase by about 10% YoY. APAC (Asia-Pacific) accounts for the remaining 13% with 25mn paid memberships. We do expect quite substantial YoY growth (24% FY21e) in this region, largely due to an increase in streaming opportunities in India. In terms of streaming revenue breakdown by geographical regions, UCAN totals 46% of streaming revenue, EMEA makes up 31%, LATAM 13%, and APAC 10% (Figure 6).


Growth Trajectory: We are very bullish on NFLX’s ability to continue on its growth trajectory, supplemented by healthy underlying business metrics in paid net membership additions and ARM. Streaming represents just 27% of US TV screen time, compared to 63% for linear television, and we expect this segment to grow relative to total screen time globally due to shifts in consumer behaviour. In addition, roughly 80% of Net Paid Additions in FY20 came

from outside of the UCAN region, reducing the reliance on ARM growth in the highly saturated UCAN region.


Quality Content: NFLX is also generating more value for its consumers by ramping up the content production in an effort to produce higher quality content for consumption – around 500 titles currently in post-production or preparing to launch, with plans to launch at least 1 new original film per week in FY21e. Testament to the quality of its content, NFLX original series and specials also received 129 Emmy nominations in Q2 FY21. Additionally, NFLX plans to add a new content category – gaming, to complement their main streaming business with an additional layer of interactivity. NFLX has also established itself as the premier streaming service amongst its peers, which we believe they are well equipped to maintain. We are also very positive about NFLX’s subscription pricing power, as the company was able to grow its paid membership numbers even with subscription price hikes in Q4 FY20.


Revenue Growth: NFLX registered gross profits of US$9.7bn in FY20, almost quadrupling gross profits of US$2.6bn in FY16, and a 26% YoY growth compared to FY19. PATMI for FY20 was US$2.8bn, and YoY growth of 48%, and with a 4-Yr CAGR of 96%. PATMI is expected to increase at a CAGR of 44% over the next 2 years due to increases in net margins (Figure 7). Revenue is expected to grow 18% and hit US$30bn by end of FY21e. We expect this to come from increasing YoY growth in Paid Memberships, as well as ARM.


Cost of sales grew at a 20% CAGR from FY16 to FY20, slightly below revenue CAGR of 23%. Operating expenses include research and development (7% of revenue), sales and marketing (9%), and general and administrative (4%). Expense categories remain largely unchanged over the last 3 years, except for sales and marketing expenses, which decreased from 15% of revenue in FY18 to 9% in FY20.

Content cost was US$10.8bn in FY20 (or 43% of revenue), US$1.6bn less than FY19, largely due to disruptions in content productions caused by Covid-19. Content costs are expected to increase over the next few years, due to an expansion in content assets. Content costs are amortized based on each title’s contractual window of availability or an estimated useful life of 10 years, whichever is shorter.


Gross margins hit an all-time high of 39% in FY20, up half a percent from FY19. Gross margins over the last 5 years seem to be on an upward trend, and we expect this to continue due to the increased scalability of the business.

Net margins in FY20 were 11%, up from 9.3% the previous year. Led by reduced operating expenses as a percentage of revenue, partially offset by an increase in tax. Similar to gross margins, we do expect net margins to increase significantly into the 15-17% range moving forward, on the back of their ability to scale effectively.


Assets: Cash and cash equivalents increased by about US$3bn YoY in FY20, largely due to increased cash flow from operations, partially offset by a reduction in debt issuance. Content assets increased marginally by almost US$1bn YoY, but we do expect a significant increase moving forward due to continued investments in quality content assets. Plant, property, equipment and intangible assets almost doubled in FY20, led by the increased capital expenditure of US$498mn.

Liabilities: Total liabilities increased slightly from US$26.4bn in FY19 to US$28.2bn in FY20, largely due to the issuance of debt in FY20. We expect total liabilities to decrease over time as the company begins to pay off its accumulated debt of around US$16bn.


Free Cash Flow (FCF) in FY20 was US$1.9bn (Figure 9), marking the first time NFLX has returned positive FCF for a financial year. We consider it an important milestone for NFLX to enable the company to self-fund growth moving forward. We do expect NFLX to continue this positive FCF trend based on increased operational efficiency.


NFLX uses a subscription-based business model with three main price plans – ranging from US$2-24, providing customers with access to video on demand (VOD) streaming services. NFLX also provides cheaper mobile-only price plans available in the APAC region, targeting customers who only have mobile phones at home. The company has high upfront costs related to: 1) content licensing, and 2) production of NFLX Original content. Distribution costs are relatively low as they leverage the use of the Internet to reach its customers. The company’s main objective is to deliver value for its customers through streaming services, at an affordable price point.


NFLX has been changing the way households consume traditional media, giving consumers the choice to move away from linear TV, towards a more flexible entertainment option like VOD streaming. It has also recently begun adding gaming content to complement its TV series and movie features.


The company has been actively investing in higher quality content assets to ensure services provided are of the very best in terms of quality and innovation – growing its content assets on its balance sheet 2.5x since FY17. NFLX also has shown strong purchasing power, adding users globally YoY while raising prices at the same time. Macro shifts in how people consume entertainment – moving away from traditional media, could provide a constant tailwind for NFLX’s customer acquisition efforts.



Currently, it is estimated that the streaming industry occupies about 27% of total US TV time, compared to 63% for linear television (Figure 12). We expect these numbers to slowly even out over the next few years as the popularity of VOD streaming picks up. The total addressable market for VOD streaming is expected to increase at a 9% CAGR over the next 5 years – US$71.5bn in FY21e to US$108.7bn FY25e (Figure 10). NFLX’s main competitors in the streaming sector are Amazon Prime Video, Disney+, YouTube, Hulu, and HBO Max (Figure 12).


Discounting Amazon Prime Video numbers – due to the nature of Amazon Prime subscription which are purchased primarily for premium e-commerce functions and not VOD streaming, the closest competitor would be Disney+ with 116 mn paid memberships, slightly more than half of NFLX’s 209 mn (Figure 11).


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