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Netflix - CEO to step down, strong subscribers beat expectations

Fourth quarter revenue rose to $7.9bn...

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Fourth quarter revenue rose to $7.9bn, which was slightly better than expected and was up 10%, ignoring the effect of exchange rates. Growth was driven by a 4% increase in average paid memberships, to 230.8m. The group added 7.7m subscribers in the quarter, which was much higher than the 4.5m forecast. This reflected both "strong" acquisition of new members and retention of existing customers thanks to popular content in the quarter. Average revenue per membership (ARM) rose 5% on a currency neutral basis.

Netflix launched its lower-priced ad-supported subscription in November and is "pleased" with results so far.

Reported operating profit of $550m was over $200m better than expected, reflecting the better revenue and slower-than-expected hiring. Underlying operating margins were 20%, at the top end of the guidance range.

Netflix spent $4bn on content in the quarter, down from $5.7bn at the same time last year. Free cash flow was $300m in the period, with full year free cash flow higher than forecast.

Reed Hastings, co-CEO and co-founder, announced he's stepping down with immediate effect and will become the group's chairman. Existing co-CEO Ted Sarandos will be joined in the job by Netflix's existing Chief Operating Office, Greg Peters.

The group expects fewer new subscribers in the current quarter, but is predicting revenue growth of 8%, ignoring exchange rates.

Netflix shares rose 7.1% in pre-market trading.

View the latest Netflix share price and how to deal

Our view

The market rewarded Netflix with a welcome bump in its valuation after the latest results were announced. A significant beat on the number of subscribers added during the final quarter went down very well, after performance in recent memory had been challenging.

While Netflix's showstopping end to the year can't be knocked, it's a mistake to think this level of growth will continue. Pretty much everyone that will ever get a Netflix subscription in the group's more mature markets, already has one. That means retention is the key in these regions. Acquisition of new subscribers will need to come from emerging economies in the long run. Growth here is moving in the right direction.

But these regions generate much less revenue-per-membership, and changing that will take a lot of time and money. At the same time, while we can be accepting of slower growth in more developed economies, Netflix cannot afford for these customers to switch off completely.

The group spent upwards of $17bn on content last year, and that's likely to continue rising with no back-catalogue of rewatchable hits to fall back on, unlike Disney+ or Amazon's new MGM Studios content. Netflix has to spend big just to keep hold of the customers it already has - let alone the cost of bringing new customers on board.

Gaming is a potential growth avenue, but it's difficult to quantify this as much more than a pipe dream at present.

Another growth lever comes in the form of all the hundreds of millions of people watching Netflix for free. The group's hoping to generate revenue from these ghost watchers. Introducing a new ad-tiered system is also savvy - offering a cheaper version to flock to as times get tougher. That said, the business risks seeing its more lucrative customers, who pay for higher resolutions and offline streaming, slide down into a cheaper plan. That means Netflix risks sacrificing margin in the name of stopping subscriber outflows, rather than replenishing the top of the funnel with new ones.

Netflix is sporting a sizable debt pile, making it much harder to manoeuvre. Investors shouldn't expect shareholder returns to be a priority for some time.

Netflix is an industry trailblazer, and as the world turns to streaming more permanently, there is potential opportunity ahead. We're more positive on Netflix than we have been, but we'd like a bit more proof that Netflix has the right idea about how to long-term growth.

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: 20th January 2023