Customer Behaviour

Netflix  reported 8.5 million net new subscribers in its fourth quarter, a dramatic uptick from the 2.2 million reported in the previous quarter and well ahead of Netflix and analyst estimates. Netflix lured 25.9 million new subscribers in the first half of the year, as shelter-in-place orders related to the COVID-19 pandemic spread globally, for an annual net gain of 36.6 million subscribers to 203.7 million total.

That performance led to Netflix revenue rising to $25 billion for the first time, and profit increasing 48% for the full year. Executives gave investors a special treat after the big gains, telling them that they expect the cash generated by the business should reliably finance day-to-day operations moving forward, after years of using massive debt to finance its growing library of video content.

The news sent Netflix shares up more than 10% in after-hours trading Tuesday, despite profits being lower than expected. After big gains amid the early-2020 surge, Netflix shares had calmed down in the second half of the year, and were down more than 5% over the past three months.

The No. 1 streaming service reported fourth-quarter net income of $542 million, or $1.19 a share, compared with net income of $1.30 a share in the year-ago quarter. Revenue improved to $6.64 billion from $5.47 billion a year ago. Analysts surveyed by FactSet had expected adjusted earnings of $1.36 a share on sales of $6.6 billion.

After Netflix reported modest gains in the third quarter, there were fears that demand for Netflix was cooling amid intensifying competition, and content, from the likes of Walt Disney Co.’s DIS, +0.48% Disney+ and Hulu, Apple Inc.’s AAPL, +0.54% Apple TV+, AT&T Inc.’s T, -0.75% HBO Max, Inc.’s AMZN, +0.53% Prime Video, and Comcast Corp.’s CMCSA, +0.32% Peacock.

“The big growth in streaming entertainment has led legacy competitors like Disney, WarnerMedia and Discovery to compete with us in new ways, which we’ve been expecting for many years,” executives wrote in a letter to shareholders Tuesday. “This is, in part, why we have been moving so quickly to grow and further strengthen our original content library across a wide range of genres and nations.”

In a 40-minute video interview following the results, Netflix co-CEO Reed Hastings acknowledged it was “super impressive what Disney has done.” “It shows that members are willing to pay more for content,” Hastings said. “It gets us fired up about increasing our membership and our content. And it’s good for the consumer.” The Silicon Valley company has plans to release more than 70 movies this year, a reflection of what co-CEO Ted Sarandos calls the diverse tastes and appetites of its members.

Netflix has used massive amounts of debt to finance that content creation, but executives said in the letter that “we believe we are very close to being sustainably [free-cash-flow] positive,” and bolded only one bit of text in the entire letter. “We believe we no longer have a need to raise external financing for our day-to-day operation,” the bolded text in the letter reads.

During the video interview, Netflix Chief Financial Officer Spencer Neumann declined to provide full-year guidance, citing “so much business uncertainty” in the age of COVID. But he quickly added that the pandemic has accelerated a big shift from linear viewing to streaming, particularly in the U.S., Asia and Latin America. “It is hard to project the next 90 days, let alone the next 12 months,” he said.

Netflix began increasing the price of popular streaming tiers in the U.S. and Canada near the end of last year as a way to counteract any slowing subscriber growth. Executives forecast that Netflix would woo a net 6 million new subscribers in the first quarter of the year, which would be a massive decline from more than 15 million who signed up as COVID-19 spread around the globe in the first quarter of 2020.

Neumann said the price increase, in turn, allowed it to reinvest in content to increase “variety and value.”

While executives did not provide yearly guidance for subscription additions, they did say that operating margin growth would slow down, a signal that they expect to not add as many subscribers in 2021. After gross margin grew 5 percentage points to 18% in 2020, they expect more modest growth of around 2 percentage points, to 20%, this year.

“We intend to continue to grow our operating margin each year at an average rate of 3 percentage points per year over any few-year period, but we anticipate some lumpiness,” executives wrote. “Some years we’ll be a little over (like in 2020), some years a little under (like in 2021).”

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