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Netflix: Competition affecting growth

Netflix posted decent Q4CY21 numbers—revenue grew 3% QoQ/16% YoY to USD7.71bn, in line with Street’s estimate and its own guidance. Margin contracted 620bp YoY to 8.2%, nevertheless beating Street’s estimate of 7.3%. Subscriber additions at 8.28mn missed the guidance of 8.5mn slightly and came in lower than 8.51mn in Q4CY20. EPS at USD1.33 topped Street’s USD0.82 estimate.

Management highlighted that the business was healthy, retention was strong, churn was down, and viewing was up. But, on the margin, acquisition didn’t grow quite as fast as expected due to intense competition. Meanwhile the company continues to focus on bringing best stories from around the world. Netflix is not rated.

Optimistic on margins

Subscriber additions stood at 8.3mn in the fourth quarter, slightly below the company’s forecast of 8.5mn. The largest contributor was EMEA (3.5mn) while UCAN added 1.2m paid memberships in Q4 (0.9mn last year), marking strongest quarter of member growth in this region since the early days of covid, and APAC added paid memberships of 2.6mn. Management expects paid net additions of 2.5mn in Q122 compared with 3.98mn in Q121. For CY22, it is targeting 19–20% operating margin versus 21% in CY21, due to a negative two percentage point impact hit from foreign currency. The company’s guidance reflects a more back-end weighted content slate with big premiers like Bridgerton S2 and the Adam project set for March.

Cash flow to be positive in FY22 and beyond

Netflix reported OCF of -USD403mn and FCF of –USD569mn. Management expects to be cash flow positive in FY22 and beyond. On balance sheet, Netflix boasts a strong cash position of USD6bn. It prioritizes cash for reinvesting in core business and to fund new growth opportunities such as gaming, followed by selective acquisitions. Management has guided for USD7.9bn in revenue for Q1CY22 with a 22.3% operating margin.

Outlook: Focusing on gaming industry

Netflix has been a major beneficiary of the pandemic-induced lockdown and is now expanding its portfolio of games across casual and core gaming genres. The company is releasing games based on its popular titles to subscribers.

Netflix faces intense competition from the consolidation of Disney/Fox, Discovery/Scripps, Viacom/CBS and Time Warner/AT&T, etc, although it hasn’t affected its growth so far since Netflix is consistently strengthening its library and accelerating content production along with a push into the gaming segment. All in all, we believe disruption in the TMT space will accelerate spending on technology, leading to higher outsourcing, benefiting Indian IT services companies. Netflix is Not Rated.

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