Netflix subscriber growth forecasts make for difficult watching

Netflix expects to add 2.5 million new paying subscribers in the current quarter, down from four million last year

Netflix's full year revenue rose 18.8 per cent to $29.7 billion, and lower than anticipated content spend in the fourth quarter helped operating margins rise from 18 per cent to 21 per cent.

The group added 8.3 million new paid subscribers in the fourth quarter, below expectations of 8.5 million, bringing the total to 222 million.

Netflix expects to add 2.5 million new paying subscribers in the current quarter, down from four million last year. The group has put this down to the timings of new content releases, which are weighted toward the end of the period. The group is targeting operating margins between 19-20 per cent in 2022, the decline is largely attributed to a stronger US dollar.

Revenue in the three months to December 31 rose 16 per cent to $7.7 billion, driven by year-on-year growth across all geographies. An expected increase in content spending pushed operating profit 33.8 per cent lower to $631.7 million.

The group added 1.19 million new paying subscribers in the US and Canada. Average revenue per membership (ARM) was up 9.4 per cent to $14.78. Subscriber growth in Europe, Middle East and Africa slowed with 3.54 million new additions compared to 4.46 million last year. ARM rose to $11.64 from $11.05.

Latin America recorded a 14 per cent increase in ARM and an 0.97 million uptick in new paid memberships.

New paid memberships in Asia Pacific rose from 1.99 million this time last year, to 2.18 million as the group lowered prices. The result was a decline in ARM to $9.26 from $9.32.

The group had a free cash outflow of $569 million compared to an outflow of $284 million last year. The group finished the year with net debt of $13.7 billion, compared to $12.5 billion last year.

Laura Hoy, equity analyst at Hargreaves Lansdown, said: “Squid Games creator Netflix has gone from a fairytale to some difficult viewing when it comes to subscriber forecasts—the most important metric for streaming services. The group’s forecast for new subscriptions in the current period came in at just over half of last year’s figure. Management blamed a back-loaded content schedule that will see several big releases come out at the end of the quarter, but investors were undeniably spooked by the slower growth forecast."

She noted that if the content timing isn’t to blame, Netflix could be in for a rough ride after a spending spree at the end of last year that pushed margins six percentage points lower. Investors were prepared for the margin decline, but worries over how the group will continue to foot the bill for blockbuster releases are creeping in. Add to that the perils of a sizable debt pile in a rising rate environment, and you have the makings for some very nervous investors, she said.

"Netflix needs splashy content to attract new subscribers, whose fees in turn fund new projects. The group’s aiming to expand further within the entertainment space to include gaming as well, so we can’t foresee content spend slowing. With that said, management’s said it expects to be cash flow positive in 2022 and beyond, so they’re clearly unphased by the slowdown in new members,” she said.

business@khaleejtimes.com