Netflix: Subscriber Growth Forecasts Make For Difficult Watching

Written by: Laura Hoy | Hargreaves Lansdown

Full year revenue rose 18.8% to $29.7bn and lower than anticipated content spend in the fourth quarter helped operating margins rise from 18% to 21%. 

The group added 8.3m new paid subscribers in fourth quarter, below expectations of 8.5m, bringing the total to 222m.      

Netflix expects to add 2.5m new paying subscribers in the current quarter, down from 4.0m last year. The group has put this down to the timings of new content releases, which are weighted toward the end of the period. The group is targeting operating margins between 19% and 20% in 2022, the decline is largely attributed to a stronger US dollar.

Revenue in the three months to December 31 rose 16% to $7.7bn, driven by year-on-year growth across all geographies. An expected increase in content spending pushed operating profit 33.8% lower to $631.7m. 

The group added 1.19m new paying subscribers in the US and Canada. Average revenue per membership (ARM) was up 9.4% to $14.78. Subscriber growth in Europe, Middle East and Africaslowed with 3.54m new additions compared to 4.46m last year. ARM rose to $11.64 from $11.05.

Latin America recorded a 14% increase in ARM and an 0.97m uptick in new paid memberships.

New paid memberships in Asia Pacific rose from 1.99m this time last year, to 2.18m as the group lowered prices. The result was a decline in ARM to $9.26 from $9.32. 

The group had a free cash outflow of $569m compared to an outflow of $284m last year. 

The group finished the year with net debt of $13.7bn, compared to $12.5bn last year.

“Squid Games creator Netflix has gone from a fairytale to some difficult viewing when it comes to subscriber forecasts—the most important metric for streaming services. The group’s forecast for new subscriptions in the current period came in at just over half of last year’s figure. Management blamed a back-loaded content schedule that will see several big releases come out at the end of the quarter, but investors were undeniably spooked by the slower growth forecast.

If the content timing isn’t to blame, Netflix could be in for a rough ride after a spending spree at the end of last year that pushed margins six percentage points lower. Investors were prepared for the margin decline, but worries over how the group will continue to foot the bill for blockbuster releases are creeping in. Add to that the perils of a sizable debt pile in a rising rate environment, and you have the makings for some very nervous investors. 

Netflix needs splashy content to attract new subscribers, whose fees in turn fund new projects. The group’s aiming to expand further within the entertainment space to include gaming as well, so we can’t foresee content spend slowing. With that said, management’s said it expects to be cash flow positive in 2022 and beyond, so they’re clearly unphased by the slowdown in new members.”

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