Netflix reported third-quarter revenue of $9.8bn, up 21% when ignoring currency moves. That was helped by the 5.1mn net new paid subscribers, which was down from the 8.8mn added in the same period last year but better than the 4.5mn markets were expecting.
Operating income rose 52% to $2.9bn, with margins imprioving from 22% to 30% - both better than expected.
Free cash flow rose 16% from last year to $2.2bn, and net debt moved from $7.4bn to $6.8bn over the quarter.
For the fourth quarter, revenue is expected to grow 15% (or 17% if ignoring currency moves), with net new paid subscribers to be higher than the quarter just ended. Full-year revenue is now expected to grow 15% (previously 14-15%).
The shares rose 6.7% in pre-market trading.
Our view
Netflix has brushed aside expectations once again, with beats over the third quarter everywhere you look - from subscribers to earnings, and a confident set of fourth quarter estimates to top it all off.
Netflix's ability to reduce churn (customers flip-flopping to rivals) is firmly rooted in its best-in-class original content. While it's expensive to make, it does keep eyeballs on screens in a bigger way. Add in a cash-generative business, and Netflix can increase content spending when peers are having to pull back.
The introduction of an ad-supported product is proving more popular than many could have hoped. It allows Netflix to penetrate new markets and tap into users who are priced out of the fully paid service. But filling all the new ad space is a challenge. While this is a new challenge for Netflix, we expect it to improve over time; it won’t want to leave ad revenue lying on the table.
The ad-supported user base is expected to reach a scale in 2025 that will make it a go-to place for advertisers. And with a huge store of user data, Netflix should be able to deliver users the right ads at the right time.
The group also has a market-leading international production and distribution network. Doing localised content right isn't easy and Netflix has an enviable footprint here. This is important because longer-term subscriber growth will need to come from emerging markets, though it is encouraging to see continued growth from its original markets.
Growth will get tougher from here, though revenue is still expected to grow double digits in 2025. The password sharing crackdown sounds like it’s run its course so new initiatives like live sport entertainment are on the cards to keep the train moving. We think that’s a good way to drive engagement, but it does add some extra risk.
Although the balance sheet carries a fair amount of debt, it isn't in bad health. Free cash flow is healthy and maintaining balance sheet flexibility is a key priority. Share buybacks, which are not guaranteed, have been the favoured way to return excess capital to shareholders but investing back in the business is the real goal for now.
Netflix is a market leader, and there are plenty of moving parts these days which could add up to longer-term growth. We don’t view the valuation as too demanding either. But the streaming space is inherently tough, with consumers more than happy to switch provider at a whim – that’s a built-in risk that needs to be considered even for a best-in-class name so we can’t rule out ups and downs.
Environmental, Social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Netflix’s management of material ESG issues is average.
Netflix has to comply with significant and often complex regulations and laws, across a very large number of different countries. The group has a global anti-corruption policy, but this is not publicly disclosed, making its effectiveness difficult to assess.
There are both internal and external audits on IP infringement risk, as well as its independent ethics hotline available for employees. Cybersecurity issues are addressed by the audit committee. But it’s unclear there is any managerial or board-level responsibility for privacy management.
Netflix key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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.
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