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Written by: Sophie Lund-Yates | Hargreaves Lansdown
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 US dollar.
Netflix spent $2.5bn on new content in the quarter, down from $3.6bn last year. Free cash flow was $2.1bn.
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 fell 2.8% in after-hours trading.
Netflix’s first quarter has failed to set the market alight, in what is the first of big tech to go in the earnings quarter that’s expected to be the worst since the pandemic started. Fundamental metrics show the business is in reasonable shape, but investors need a little more than that to shake off remaining concerns about a downturn lurking in the shadows.
In the face of a tough economic backdrop, Netflix’s roll-out of a cheaper ad-supported tier is effectively enticing more subscribers onto the platform. 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.
There are some Netflix-specific growth avenues in the tough world of streaming, where competition is rife. Share of total viewing is in the single digits in all Netflix’s territories, which means there’s room for expansion if they can nail their proposition. A large part of that involves spending. It’s incredibly difficult to cut your way to growth, which is the stance being taken by some rivals. The amount Netflix spends on original content sets it apart from rivals and creates a deeper moat, and ultimately attracts a better level of retention and attraction of subscribers. This is especially true in the group’s better-established international production and distribution channels. Localised content is very hard to get right, and Netflix has an enviable footprint in that department.
The new crackdown on account sharing could leave some dents in engagement as people switch off and fail to become independent subscribers. The depth of these cuts will need to be tended to, but for long-term value creation the new policies are the right move.
Investors aren’t immune to the fact that the task ahead of Netflix is huge. It needs to run fast while also grabbing land from its nearest competitors, and there’s little time for rest. Luckily, Love is Blind, but this media giant seems to have its eyes wide open for now.
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