Written by: Laura Hoy | Hargreaves Lansdown
Revenue growth slowed considerably in the first quarter, up 9.8% to $7.9m compared to 24.2% at the same time last year, and 16% last quarter. This trend is expected to continue, with Q2 growth forecast at 9.7% as new subscriptions are seen falling by 2.0m as competition increases. An estimated 100m households are currently using the service without paying subscription fees through shared memberships.
Lower than expected content spend meant operating income was better than management expected, at $2.0bn. This is expected to fall to $1.7bn in the second quarter.
Netflix is aiming to maintain an operating margin of around 20% as it finds ways to reignite revenue growth and address the membership sharing issue.
The number of new paying subscribers fell by 0.2m in the first quarter, bringing the total to 221.6m. This is in part thanks to the suspension of services in Russia, which was responsible for a 0.7m decline in new subscribers in the first quarter. Price increases and rising competition will also weigh on subscriber growth.
A price increase in the US and Canada meant new subscribers fell 0.6m as expected. Latin America saw a 0.4m decline in new subscribers reflecting the impact of price changes and macroeconomic weakness. Excluding the impact of Russia, Europe, Middle East and Africa gained 0.4m new subscribers.
Netflix spent $3.6bn on content additions in the period. Free cash flow rose from $692m to $802m, reflecting the increased profits. This includes $125m spent on visual effects and gaming acquisitions. The group also announced plans to acquire Next Games, which is expected to complete in the second half of this year. Net debt was $8.6bn.
The shares fell 25.5% following the announcement.
Households around the world may have racked up a record breaking 627m hours watching Netflix’s smash hit Bridgerton, but a lot of those people weren’t paying. The streaming service has made its way into just about every home with an internet connection and that’s made it much harder to continue growing revenue. Price increases helped offset pain from a decline in new subscriber numbers—but the group’s looking for a more permanent way to cope with rising demand on the public’s attention.
Streaming services are a dime a dozen these days, and standing out is an expensive undertaking. Unlike rivals Disney and now Amazon, which owns a trove of content through its MGM acquisition, Netflix doesn’t have much of a back catalogue of content comparatively speaking. Netflix practically invented binge-watching, but the entertainment it’s serving up is getting more and more costly as it’s forced to build its own slate of hit-shows.
Luckily this is something Netflix does well—its name has become synonymous with addictive TV. This is something the group’s leaning on to reaccelerate revenue growth. Management will be hoping the 100m or so households that have been tuning in for free will be willing to pay to do so going forward.
Gaming is also bubbling under the surface as a potential revenue driver with two acquisitions bolstering the group’s ability to serve an entirely new market. The group spent over $17bn on content last year, and that’s likely to be a minimum for this year’s spend. Protecting profits is high on management’s priorities with an aim to keep margins over 19%, but as revenue growth stagnates, it’s difficult to see how the group will continue to grow its user base without succumbing to eyewatering content costs.