When Netflix reported in Q3 there was some doubt as to whether it would be able to compete with its deeper pocketed peers, as well as whether its new ad-supported tier would cannibalise its revenue base as users traded down to a cheaper package.
These fears have proved unfounded with the last 2 quarters seeing the streaming company blow past expectations with a big surge in new subscribers.
Fears that the crackdown on password sharing would prompt a slowdown in subscriber numbers have also proved to be unfounded, after last night’s Q4 results saw another 13.1m subscribers added on top of the 8.76m added in Q3 taking the total number of paying subscribers to 260.28m, pulling further ahead from its deeper pocketed rivals of Disney, Apple, Amazon and Paramount Global.
Q4 revenues also beat forecasts coming in at $8.83m, an increase of 12.5% year on year, while net income came in at $2.11c a share or $938m which was slightly below forecasts, due to a $239m non-cash un-realised loss on euro denominated debt.
Unlike Q3 Netflix saw subscriber gains from all its major regions, with the best percentage performance coming from the APAC region which saw a net change of 2.91m or 62%, although year on year the numbers are still down by 5%.
Netflix biggest growth area in percentage terms was Latin America which saw 16% growth, reduced to 4% on an FX adjusted basis.
Annual operating margins rose to 21% in 2023, from 18% in 2022, while cashflow rose to $6.9bn.
On guidance Netflix was also bullish projecting Q1 revenues of $9.24bn, a jump in operating margin to 26.2% and profits of $4.49c a share.
For the full year, Netflix raised its operating margin forecast to 24%, with the intention that this will improve year on year as the FX hedging model evolves over time.
All this positive news helped the shares surge in after-hours trading in the US with the expectation that they open at 2-year highs when US markets open later today.
On the topic of the $5bn deal announced with WWE’s RAW, while much has been made of the price tag and the inherent risks of paying such a large sum and a relatively small addressable market, the deal is over 10 years which equates to $500m a year.
When you consider the sums of money involved in securing other sporting events then the numbers aren’t so alarming.
With the success of the last couple of quarters and the ability of Netflix customers to absorb price increases it stands to reason that Netflix will adjust their pricing model and the intention to phase out the basic subscription to simplify their pricing model makes sense.
In the UK Netflix also benefits to some extent from the bundling benefits that allow it to be absorbed into the pricing of a Sky package which means many Sky users don’t even see the price increases.
The ads business has continued to go from strength to strength, although it’s not immediately clear how revenue accretive that area of the business is as Netflix haven’t broken down the numbers.
One other bonus is that the penny finally appears to have dropped that they need to adopt an FX hedging program given that 60% of their revenue is non-US dollar based and is likely to increase over time. Netflix said this was in its early days and that while they aren’t currently fully hedged this will improve over time so that they eventually get to a situation where this becomes less of an issue.
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