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Netflix: Growth accelerates strongly

Netflix posted strong Q3CY21 numbers—revenue grew 1.9% QoQ/16.3% YoY to USD7.48bn, in line with Street’s estimate and much ahead of its own guidance. Margin contracted 170bps QoQ to 23.5%, but still much higher than Street’s estimate of 20.9%, while subscriber additions at 4.38mn beat guidance of 3.5mn and came in higher than 2.2mn in Q3CY20. EPS at USD3.19 topped Street’s USD2.56 estimate.

Management highlighted that business growth remains healthy, as it had been throughout the year, with churn at low levels down to prior comparable periods. Retention is healthy and viewing is up. It is focusing on growing margins at roughly 3 percentage points per year on average, on a multi-year basis. Netflix is ‘not rated’.

Expect strongest Q4 content offering

Subscriber additions stood at 4.38mn in the third quarter, much ahead of the company’s forecast of 3.5mn, of which half were from the APAC region. Net paid memberships in Europe of 1.8mn improved significantly versus 188k in Q2 led by several titles. Management expects paid net additions of 8.5mn in Q421 compared with 8.51mn in Q420. For CY21, it is targeting 20% operating margin versus 18% in CY20. Nielsen estimates Netflix is just 6% of US TV screen time, which indicates a long growth runaway. During Q3, it announced an agreement to acquire the Roald Dahl Story company (pending regulatory approval).

Cash flow to be positive in FY22

Netflix reported OCF of USD82mn and FCF of -USD106mn. Management anticipates Q4CY21 FCF to be negative owing to ramp-up of production volume and a lower operating margin, but continuesto expect full-year FY21 FCF to break even and FY22 FCF to be positive. On balance sheet, Netflix boasts a strong cash position of USD7.6bn. 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 USD7.7bn in revenue for Q4CY21 with a 6.5% operating margin.

Outlook and valuation: Strong content pipeline ahead

Netflix has been a major beneficiary of the pandemic-induced lockdown with subscribers logging onto the app/site in hordes in 2020. It has rebounded strongly in this quarter led by strong content offerings such as Squid Game and Money Heist. Management expects strongest content offerings in Q4CY21.

Meanwhile, Netflix faces intense competition from consolidation of Disney/Fox, Discovery/Scripps, Viacom/CBS and Time Warner/AT&T, etc. Even so, its growth is not affected as Netflix is consistently strengthening its library and accelerating content production. 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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