• 1Q23 results were in line with our estimates. 1Q23 revenue/PATMI at 24%/24% of our FY23e forecasts. Currency was a 4% point drag to revenue growth.
• Revenue growth remained resilient at 4% YoY, supported by a 5% increase in membership base. Netflix added 1.8mn new members, mostly from Asia.
• 1Q23 operating income of US$1.7bn beat guidance by 5% on better management of expenses. FY23e FCF guidance increased by US$500mn to US$3.5bn due to improving operating leverage.
• We maintain ACCUMULATE with an unchanged DCF target price of US$388.00. Our WACC and growth rate assumptions remain the same at 12.2% and 3% respectively.

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.