• 4Q22 revenue/earnings (excl. one-offs) in line with our estimates. FY22 revenue/PATMI at 100%/100% of our FY22e forecasts. Headline earnings were dampened by a US$462mn unrealized loss on its US$5bn debt remeasurement.
• Membership additions continued for a 2^nd straight quarter (7.7mn actual vs 4.5mn expected), with 3.2mn additions from EMEA. Positive early signs for “Basic with Ads” plan, with better-than-expected user engagement.
• 4Q22 operating income US$220mn above guidance. FY22 Positive FCF of US$1.6bn compared with -US$159mn in FY21; guidance of US$3bn in FCF for FY23e.
• We downgrade to ACCUMULATE with a raised DCF target price of US$388.00 (prev. US$346.00) as we account for recent share price performance, and factor in an expansion in margins for FY23e and FY24e on the back of increasing operating leverage. Our WACC and growth rate assumptions remain the same at 12.2% and 3% respectively.

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 2^nd 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.