The Lunar New Year has been a wet one so far, and the extended holiday may see more people stay at home to relax and binge-watch their favourite movies and TV series in comfort.
If like me, you enjoy your usual dose of streaming television, you are likely a Netflix (NASDAQ: NFLX) subscriber.
The streaming giant saw its shares lose half their value last year as subscriber numbers contracted over two consecutive quarters.
Investors were worried about the competition and how it would affect subscriber growth for Netflix, sending its shares down to their lowest level in five years.
As 2023 rolled in, Netflix saw its shares stage a strong rebound, and are up 23% this month alone.
Could the worst be over for the streaming behemoth?
Can Netflix post steady and consistent growth once again?
An impressive finale
Netflix recently released its fiscal 2022’s fourth quarter (4Q2022) and full-year (FY2022) earnings.
The company’s global paid memberships rose 4% year on year to hit a record high of 230.75 million.
On a quarter-on-quarter basis, the Californian company added a whopping 7.66 million subscribers, blowing past analysts’ expectations of 4.57 million additions.
Revenue inched up 1.9% year on year for 4Q2022 to US$7.85 billion but its operating margin shrank to 7% from 8.2% a year ago.
The lower margin was attributed to foreign exchange headwinds as the US dollar strengthened against other currencies.
For FY2022, revenue grew 6.5% year on year to US$31.6 billion but operating and net profit tumbled 9.1% and 12.2% year on year, respectively, to US$5.6 billion and US$4.5 billion.
Despite the slightly weaker results, Netflix saw its free cash flow jump to US$1.6 billion, reversing the negative free cash flow of US$132 million a year ago.
Netflix’s ad-supported tier
Netflix launched its new ad-supported tier in November in 12 countries.
It’s still early days according to management, but engagement has been better than expected and there has been limited switching from existing non-ad plans (i.e. cannibalisation).
Based on initial indications, the ad-supported plan has similar unit economics or even better compared to the company’s ad-free plans.
This bodes well with the company’s ability to generate additional revenue and profit.
There is still more that can be done in terms of better-targeting cum measurement of the effects, but these early results are encouraging and are helping Netflix to garner more members through a lower price point.
Continuously churning out solid new content
Netflix is also well-known for churning out a wide variety of original content and management is focused on improving its slate further.
Members watched more returning seasons and sequels last year than ever before across a broad range of genres, underscoring the importance of maintaining a diverse portfolio of content to attract more members to sign up.
For newly-reported markets such as Poland, Mexico and Brazil, Netflix represents less than 5% of TV viewing, suggesting that there is still a long runway for future growth in these countries.
The combination of new, attractive content along with the low penetration of streaming TV in numerous markets means that Netflix can continue to expand and extend its market share over time.
Additional revenue streams
Apart from its ad-free and ad-supported plans, Netflix also intends to roll out paid sharing in the current quarter.
The company is aware of members who share their accounts with other family members or friends living in different households.
Hence, Netflix will offer these members the option to pay extra if the service is being streamed in more than one household, opening up an additional stream of revenue for it.
It’s also been over a year since the company launched its games division as a separate revenue generator.
The division now has a portfolio of 50 games and Netflix has also acquired four games studios to boost its internal production capabilities.
Executing its succession plan
With succession being a hot topic, Netflix’s co-founder and co-CEO Reed Hastings has announced that he is stepping down to become Executive Chairman.
In his place, COO Greg Peters will join current co-CEO Ted Sarandos as a second co-CEO and also a member of Netflix’s board of directors.
Both Ted and Greg have been credited with deep knowledge of entertainment and technology and have a proven track record of performance at Netflix.
Get Smart: A small stumble for Netflix
In hindsight, the decline in subscriber numbers back in the middle of last year seemed like a small blip.
Time was needed for Netflix to launch its ad-supported tier and to come up with a strong slate of content to convince people that its service was superior to competitors such as Disney+ and Apple TV.
The worst seems to be over for the company for now, and Netflix has also estimated that it can generate US$3 billion of free cash flow this year.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
