The last few months have been positive ones for the Netflix share price. Having hit five-year lows back in May last year, the shares have surged over 75% since then, although they are still over 50% below the record highs seen in 2021.
When the company reported in Q3 there was some scepticism that the addition of an ad-tier might cannibalise their existing user base, as the streaming market becomes ever more competitive. One of the big concerns for investors has been how Netflix, which doesn’t have any other revenue streams, will be able to cope against its deeper-pocketed rivals of Amazon, Disney, Apple, and now Paramount.
Nonetheless management expressed confidence that they could finish the year on a high, with an expectation they would be able to deliver a strong final quarter, at $7.78bn in revenue. Net income was expected to see a fall to $163m or $0.36 a share, and operating margin to fall to 4.2%, down from 8.2% a year ago. Subscriber numbers were also expected to rise by 4.5m to a new record of 227.6m.
The question that was being asked, given the solid rebound in the share price in the last few months, was whether Netflix would be able to deliver the goods, and last night’s results answered that question emphatically with a resounding 'yes', certainly as far as subscribers were concerned, helped by content like the Knives Out film, Glass Onion, and the surprise Addams Family spin-off Wednesday.
Q4 revenue beat expectations, coming in at $7.85bn, as did paid subscriber numbers, which blew through forecasts, coming in at 7.66m rising to 230.75m, an increase of 4% year-on-year, with 3.2m coming from the EMEA region. With such a big increase in subscriber numbers, it's perhaps surprising that revenues weren’t higher, which suggests that perhaps there was some cannibalisation because of the rollout of the new ad tier service. Having finished the day lower yesterday, last night’s results saw the Netflix share price rebound strongly in after-hours trading, with the big test whether it can sustain that move when US trading reopens later today.
Profit on the other hand, came in short at $0.12 a share, or $55m, which the company put down to a $462m unrealised loss on their euro non-denominated debt, due to the depreciation of the US dollar against the euro during Q4. Operating margin came in at 7%, which was at the upper end of expectations, and unlike Q4 last year, Netflix was able to deliver positive cashflow in Q4 of $332m. Total revenue for 2022 came in at $31.62bn, while operating expenses rose to $25.99bn, cutting annual operating margin to 17.8% from 20.9%.
For Q1 2023, Netflix says it expects to generate revenue of $8.17bn, and profit of $1.27bn, or $2.82 a share. As indicated in the Q3 shareholder letter, Netflix is no longer offering guidance on subscriber numbers and instead will be rolling out paid sharing in Q1, which might prompt some cancellations in the short term, as it looks to crack down on password sharing. The company also announced that co-CEO Reed Hastings would be stepping down, and taking up the position of executive chairman, while Greg Peters would take up the vacant co-CEO position alongside Ted Sarandos.