Netflix (NFLX) – Q4 Earnings Review – January 25, 2024
Netflix needs no introduction.
Demand
Netflix beat revenue estimates and its revenue guidance by 1.4% each. This was attributed to some help from foreign exchange as well as outperforming member growth. Its 10% 3-year revenue compounded annual growth rate (CAGR) compares to 9.9% as of last quarter and 10% 2 quarters ago. It also crushed net new subscriber estimates by 38% while beating its rough guidance by about 47%. The 13.1 million net new subscribers represents a new record and compares to 7.7 million in the Y/Y period. Average revenue per member (ARM) growth of 1% Y/Y was in line with its guidance.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Margins
Netflix beat GAAP EBIT estimates by 23% & beat free cash flow estimates by 29.5%. Conversely, it missed $2.23 GAAP EPS estimates by $0.12. This was entirely driven by a $239 million non-cash charge from FX losses. It would have beaten estimates by $0.41 without this charge.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $7.1 billion in cash & equivalents
- $14.1 billion in long term debt.
- Diluted and basic share counts both fell by more than 1% Y/Y due to buybacks. It bought back about $6 billion in stock in 2023. It has $8.4 billion left in buybacks under the current plan.
- It has $400 million in convertible senior notes maturing in Q1, which it plans to pay off with its existing cash pile.
Guidance
Q1:
- Netflix revenue guidance just barely missed consensus estimates. Its 13% Y/Y growth guide includes a 300 bps headwind from foreign exchange (mainly due to Argentina).
- Paid subscribers will rise by more than 1.8 million in Q1.
- ARM will be roughly flat Y/Y.
- EBIT guidance beat estimates by 8%.
- EPS guidance beat $4.10 estimates by $0.39.
2024:
- “Expect healthy double digit revenue growth” for 2024. This is roughly in line with estimates calling for 13.5% Y/Y growth.
- High single digit Y/Y % rise in content amortization based on recovering content spend post writer/actor strikes.
- $6 billion in 2024 free cash flow. $17 billion in content spend vs. $13 billion in 2023.
Based on this, Netflix trades for roughly 27x next 12-month (NTM) EBIT, 32x NTM EPS and 33x NTM FCF. EBIT is expected to grow by 27% Y/Y in 2024; EPS is expected to grow by 33% Y/Y in 2024; FCF is expected to fall by 5% Y/Y in 2024 as it normalizes content spending.
Call & Letter Highlights
2023 in Review & 2024 Preview:
For the year, Netflix saw revenue growth accelerate from 6% Y/Y in 2022 to 12% Y/Y in 2023. This was helped mightily by far easier growth comps as we move further away from the pandemic pull-forward. Still, EBIT margin also sharply improved from 18% to 21% Y/Y for 2023 while it exponentially grew free cash flow to $6.9 billion vs. $1.6 billion Y/Y. Importantly, $13 billion in content spend (vs. $17 billion in 2022) due to the writer-actor strikes helped FCF generation. Still, that wasn’t the sole cause of the rapid growth as other cost controls and accelerating revenue both helped too. Netflix thinks the strikes only added $1 billion to 2023 FCF.
For 2024, Netflix has the following priorities:
- Scale the advertising business.
- Broaden the content offering with more games and live titles (like with the new WWE partnership).
- Create more live experiences, like with its Stranger Things Play.
It’s just 5% saturated in its total addressable market with TV market share under 10% in all nations. There is plenty of runway left for more growth. It will look to content licensing (like the new WWE deal) and continued aggressive investment in home-grown IP to continue pursuing this growth. Notably, while it expects a lot more industry consolidation, it does not plan to take part in it and has no interest in acquiring linear assets.
New WWE Deal & Gaming (newer content categories):
Starting next year, Netflix will exclusively air WWE Raw content across North America and the UK. It will host all live and scripted content from the league as well. Netflix leadership sees this as a very under-distributed league that its reach can greatly help with. The economics of the deal were not disclosed, besides the team saying they were “super happy” with the terms. This was already part of the planned $17 billion in 2024 ad spend, and will become a key tool in the rapid scaling of its advertising branch.
Netflix was drawn to WWE representing the intersection of sports and drama/entertainment. It thinks this fits best within its current content niche and told investors that this news “does not represent a change in the live content strategy.”
Gaming engagement tripled Y/Y. Most of its success continues to come from licensing popular titles like Grand Theft Auto. It is enjoying traction from its highest quality IP like Stranger Things as well.
Streaming King:
Netflix boasted the top original TV series for 48 weeks, the top original film for 41 weeks and the top acquired series for 44 weeks in 2023. This data is per Nielson and not internal claims – making it far more legitimate. Its share of TV viewing hours in the UK and the USA is stable Y/Y at 9% and 8% respectively. In Mexico and Brazil, it moved from 4% to 5% Y/Y.
Advertising:
Netflix continues to enjoy explosive advertising growth from a still small base. Impressively, it has 23 million ad-supposed monthly active users vs. 15 million Q/Q and 5 million just 6 months ago. 40% of all new members opted into its ad-tier in the nations where it’s offered (vs. 30% last quarter) while it continues to sharpen targeting and measurement to provide more value to ad buyers. Still, advertising revenue is a small portion of overall results and will not become a primary growth driver until 2025.
The firm is phasing out its cheapest non-ad-supported tier in select markets like Canada and the UK in Q2 2024. Why? Because it wants to motivate users to select the ad tier where its revenue per member is actually higher. Despite ad load being very minimal on streaming platforms, granularity is unmatched. The always signed-in, programmatic nature of ad buying means that buyers can target two eyeballs in real time rather than two million people several months in advance. Netflix has complete and fully leverage-able customer data profiles to optimize relevance, which drives up the value of its impressions.
Advertising margins “remain very high” per the team.
Paid Sharing:
As a reminder, Netflix paused price hikes during the paid sharing rollout (as it views paid sharing as a different form of price hiking). With paid sharing mostly implemented today, it will get back to occasional price hikes like it did late in 2023. Growth was driven entirely by more subscribers in 2023. Netflix sees revenue per member contributing more normally to growth in 2024. Notably, this monetization optimization means Netflix can invest in more content to bolster the value proposition further.
- Churn rate continues to outperform expectations amid the password sharing crackdown.
- There are still more households where its paid sharing policy change has yet to be implemented. Most, but not all, have already been affected.
- This hurts engagement per household metrics as Netflix allows fewer people to use the exact same account. More importantly, it’s a revenue tailwind.
Take
Netflix has re-discovered its groove & fundamental rhythm. It has successfully re-accelerated the top line while tightening its belt and delivering compelling margin expansion. While 2023 was a weird year via password sharing crackdowns, strikes and an advertising debut, 2024 should look a lot more normal. It’s gearing up to lean heavily into content spending across scripted, live and gaming; it has the cash flow and balance sheet to fully support that objective. This is the streaming king and Q4 did nothing to change that reality. Congrats to shareholders on another wonderful quarter.
