Netflix added 2.4m paying subscribers in the third quarter. That's better than the 1.0m forecast, but 2.0m lower than the same time last year. Operating profits dipped to $1.5bn from $1.8bn, but this was better than expected because of the higher revenue and favourable timing of some costs.
The group said the appreciation of the US dollar remains a "significant headwind" - this affects profits - and that it's hard to accurately predict demand because of difficult economic conditions. Nonetheless, the group expects 4.5m new paying subscribers in the fourth quarter.
The shares rose 14.4% in after-hours trading.
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Our view
Netflix added more subscribers last quarter than planned. That's not to be sniffed at. The group's been on a rollercoaster recently, which has involved heavily disappointing the market at times with subscriber losses.
It's becoming much harder to squeeze more revenue out of the group's biggest markets - pretty much everyone that will ever get a Netflix subscription in the US and Canada already has one. That puts the onus on emerging economies, which played out last quarter with Asia Pacific the biggest contributor to subscriber growth.
But these regions generate much less revenue-per-membership, and changing that will take a lot of time and money. At the same time, while we can be accepting of slower growth in more developed economies, Netflix cannot afford for these customers to switch off completely.
The group spent upwards of $17bn on content last year, and that's likely to continue rising with no back-catalogue of rewatchable hits to fall back on, unlike Disney+ or Amazon's new MGM Studios content. Netflix has to spend big just to keep hold of the customers it already has - let alone the cost of bringing new customers on board.
Gaming is a potential growth avenue, but it's difficult to quantify this as much more than a pipe dream at present.
Another growth lever comes in the form of all the hundreds of millions of people watching Netflix for free. The group's hoping to generate revenue from these ghost watchers. Introducing a new ad-tiered system is also savvy - offering a cheaper version to flock to as times get tougher. That said, the business risks seeing its more lucrative customers, who pay for higher resolutions and offline streaming, slide down into a cheaper plan. That means Netflix risks sacrificing margin in the name of stopping subscriber outflows, rather than replenishing the top of the funnel with new ones.
Netflix is sporting a sizable debt pile, making it much harder to manoeuvre. Investors shouldn't expect shareholder returns to be a priority for some time.
Netflix is an industry trailblazer, and as the world turns to streaming more permanently, there is potential opportunity ahead. For now, we'd like a bit more proof that Netflix has the right idea about how to sustain growth.
Netflix key facts
All ratios are sourced from Refinitiv. 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.
Third Quarter Results
Higher subscription additions helped overall revenue rise almost 6% to $7.9bn. The fastest revenue growth was in Asia Pacific, which rose 19%, excluding the effect of exchange rates to $889m. That reflected 23% growth in average subscriber levels, with 1.43m joining. The slowest revenue growth of 11% to $3.6bn came from the US and Canada, which is Netflix's most mature region. New additions were only 0.1m in this region. Europe, Middle East and Africa (EMEA) and Latin America saw revenue rise 13% to $2.4bn and 19% to $1.0bn respectively.
Average revenue per Membership (ARM), also excluding currency movements, rose in all regions other than Asia Pacific and EMEA. The US and Canada remains the group's most lucrative, with ARM of $16.37 over the quarter.
Netflix spent $4.6bn on content in the quarter, which was similar to the previous year. For the year to date, the content bill stands at $12.9bn, some $800m higher than this point in 2021.
Ignoring the effect of adverse movements in the dollar, operating margins were 22.5% in the financial year to-date. Netflix is on track to meet its full year margin targets.
Underlying free cash flow was $471.9m, compared with an outflow of $106.3m the previous year. The group's on track to target free cash flow of over $1bn for the full year. Net debt stood at $7.9bn as at the end of September, equivalent to 1.2 times cash profits.
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