Written by: Nicholas Hyett | Hargreaves Lansdown
Netflix reported a 9.4% year-on-year increase in global paid memberships in the third quarter, with growth driven by the Asia Pacific region. That takes the group to a total of 213.6m subscribers, slightly better than management had expected. Underlying average revenue per member rose 5%. The combination of more subscribers and higher average prices meant quarterly revenue rose 16.3% year-on-year to $7.5bn, broadly in line with market expectations.
Quarterly operating profits rose 33.5% year-on-year to $1.8bn. That was significantly better than analysts expected, thanks in part to the timing of investment in new content and lower than expected marketing spend.
The group reported a free cash outflow in the quarter of $106m, compared to a $1.1bn inflow in the same period last year. However, the group continues to expect full year cash flow to be around breakeven, despite further outflows next quarter. The group finished the quarter with net debt of $8.0bn, down from $8.1bn a year ago.
Management expect fourth quarter revenue to rise 16.1% year-on-year, to $7.7bn, with operating profits of $500m as content spending increases.
Netflix shares were broadly unmoved following the announcement.
“Netflix is rightly proud of delivering something for everyone, and these results are no exception. Whether you’re a bull or a bear – there’s something for you to latch onto. The shares, as a result, have gone basically no-where in initial aftermarket trading.
For those who take a rosy view of Netflix’s future there’s subscriber growth that’s significantly faster than even management expected. That’s fed through to expectation-beating revenue and, together with lower content spend, provided a healthy leg-up to profits. Given the group is lapping incredibly strong growth delivered during the pandemic, this is no mean feat. The fact growth is now being driven by progress outside the core North American and European markets is testament to the global appeal of Netflix content – something some commentators have been sceptical of in the past.
For those more bearish about Netflix's future, it’s guidance for next quarter’s profits that will be firmly in the frame. Margins are expected to collapse from 23.5% to just 6.5%, as content spend ramps up. The likes of Leonardo DiCaprio, Jennifer Lawrence and Dwayne Johnson do not come cheap it would appear. If this is the kind of big budget spending the group now needs to keep up with rivals that is bad news for long term profits.
On the subject of competition Netflix makes an interesting comment about its competition with non-streaming platforms. The group saw engagement leap 14% during the recent Facebook/Instagram/WhatsApp outage, implying it competes far beyond streaming for subscriber attention. On the one hand that’s good news, since it means growing rivals like Disney and Amazon are perhaps less of a threat than first thought. On the other Netflix content needs to fight not just traditional video, but literally every other form of entertainment out there. Bull or bear Netflix always has something to offer.”