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Netflix - revenue in line but subscribers miss expectations

Revenue rose 8% to $8.2bn in the first quarter, ignoring the effect of exchange rates.

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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.

View the latest Netflix share price and how to deal

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

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 19th April 2023