Revenue rose 8% to $8.2bn in the first quarter, ignoring the effect of exchange rates. That was in-line with Netflix's expectations and reflects a 4% increase in Average Revenue per Membership (ARM). The group added 1.75m subscribers in the quarter, which was behind analyst expectations.
Operating profit was a little better than expected at $1.7bn, reflecting controlled spending and the timing of staff and content spending. On a reported basis, there was a 4-percentage point decline in operating margin to 21%, largely because of changes in the value of the US dollar.
Netflix spent $2.5bn on new content in the quarter, down from $3.6bn last year. Free cash flow was $2.1bn. Net debt was $6.7bn, equivalent to 1.1 times cash profits over a twelve month period.
Netflix is on track to meet its full-year expectations and expects revenue of $8.2bn in the current quarter. The group's been "pleased" by the results of initial paid sharing, which was launched in four countries. Engagement on lower-priced ad-supported tiers has been better than expected.
The shares were unmoved in after-hours trading.
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Our view
The market was non-plussed about Netflix's first quarter results. That's partly because of wider market jitters but also some Netflix-specific challenges.
The group missed expectations on subscriber numbers. It's hard to map what growth here will, or indeed, should be, as Netflix's business is very mature in developed regions. At the same time, the group's slowing down on its roll-out of a crackdown on account sharing. Stopping multiple people using the same login has long-term benefits, including making money from the millions of people using Netflix for free. The challenge is making sure those who can no longer use their mate's login become bona fide subscribers, rather than switching off.
Retention and attraction of subscribers is a very difficult task. Competition in the streaming sector is tough. Netflix isn't blind to this, and is set apart by the amount of money it spends on original content compared to peers. Original content tends to help with retention more than recycled material and is partly why Netflix spends about $17bn a year on content overall.
The group also has a market-leading international production and distribution network. Doing localised content right isn't easy and Netflix has an enviable footprint here. This is important because longer-term subscriber growth will need to come from emerging markets.
Looking nearer-term, Netflix faces challenges of the economic variety in its core markets like the US and UK. As people dial down spending in the wake of inflation, the group's introducing a cheaper ad-supported plan. Fortunately, it looks like there's only limited switching from paying tiers which means Netflix is topping up the funnel of long-term revenue rather than draining the existing reservoir, but this will need to be monitored.
The balance sheet, although carrying a fair whack of debt, isn't in bad health. That said, investors shouldn't be holding their breath for shareholder returns any time soon. The priority now is investing in the business and content for growth.
Netflix is a market leader, and there are plenty of moving parts these days which could add up to longer-term growth. We also note the valuation isn't as unreasonable as it has been. In the short-term, the group's valuation is likely to fluctuate with the wider market mood music, which will depend on the performance of major western economies.
Netflix key facts
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