Text | U.S. Stock Research Agency
A week after announcing the price increases for services in the United States and Canada, after hours on January 20, Netflix released its fiscal 2021 Q4 financial report. Although indicators such as revenue and profit have hit recent records, in the first quarter, because the number of users was far less than expected, Netflix's stock price fell by a rare 20% after hours.
FactSet's data previously showed that analysts had lowered their expectations for Netflix's new users before earnings reports. Even with JPMorgan Chase in favor of the increase in revenue brought about by price increases, the agency's research report emphasizes that this is in exchange for losing a small number of users. Netflix's performance is tilting in this direction, and the growth of Q4 is acceptable, but it is expected that 2022Q1 will stall significantly.
Apparently, the 2021 Squid Game craze is over. Now, the market is beginning to pay attention to the new drama and user growth issues in 2022, the competition with streaming media such as HBO after the price increase, and the trend after the stock price falls. When the growth stock loses its growth power, Netflix begins to "water reverse" again?
U.S. and Canadian users lead the way in total revenue, with emerging market expectations slowing and revenue issues highlighted
Unsurprisingly, Netflix's Q4 revenue was $7.709 billion, and its full-year revenue for fiscal 2021 was $29.698 billion, up 16% and 19% respectively from the same period last year. Overall growth was in line with expectations (Q4 revenue was slightly lower than $0.01 billion).
The bulk of revenue still comes from the U.S. and Canada, contributing $3.309 billion, EMEA (Europe, Middle East, Africa) contributing $2.523 billion, and Latin America + Asia Pacific two emerging markets combining only $1.835 billion. Revenue has never been the focus of Netflix, it is only one of the external expressions of Netflix's growth logic. For a long time, Netflix also relied on the operation of the US ga-based camp to transfuse blood for emerging markets, and the "cause" of the sharp decline in stock prices also came out here.
On the issue of the number of users that are generally concerned by the market, the number of users of the global streaming service increased by 8.28 million, down 2.7% from the net increase of 8.51 million in the same period last year, but higher than the average analyst expectation of 8.19 million. CFO Spencer Newman still attributed it to quality content such as "Squid Games" on the earnings call: "We are quite happy with the performance of the quarter, the company is also quite satisfied with the performance of the content, and the viewership is very good, from the ratings king "Squid Game" at the beginning of the quarter to the finale of episodes such as "The House of Paper" at the end of the quarter, and the return of dramas such as "The Witcher" and the biggest films produced." ”
"Overall, the business has developed healthily, the user retention rate has remained at a strong level, the churn rate has declined, and the viewership has increased." He said so. However, the market interpreted the growth story as a "ghost story" after the 2022Q1 guidance – Netflix expects Q1 subscribers to increase by 2.5 million, not only down from the 3.98 million added in the first quarter of 2021, but also well below the 6.93 million that analysts generally expected. There's a factor that Netflix can't compete with.
Q4 The number of new users in the Netflix region was 1.19 million, and the number of new international users was 7.09 million, which shows that for Netflix's positioning, international growth is the highlight. The low guidance in Q1 actually implies that Netflix's first quarter won't be very attractive to emerging markets – with growth peaking in Netflix's developed markets, anyone can understand how big the expected future risks are.
ARPU in the U.S. and Canada has always been the first of the four regions, while arpu has declined for two consecutive quarters in asia-Pacific, one of Netflix's two major emerging markets, which is not in line with the growth genes of Netflix's user flywheel. In December 2021, Netflix slashed prices in India due to competition between Disney and Amazon. According to media partners Asia, Netflix has only 5 million users in India, while Disney and Amazon have 46 million and 19 million, respectively.
The growth of the most developed markets is almost stagnant, how to support the emerging markets that are likely to continue to lose money in the short term? Growth in emerging markets is also unstable, which directly causes Netflix to stall. Netflix can only hope for the next Squid Game-style global hit. Obviously, judging from the current content reserves and guidelines, the first quarter will not be a lucky season.
Operating margins have fallen again, and the content arms race cannot be stopped
Netflix's Q4 2021 operating profit was $632 million, down from $954 million in the year-ago quarter; operating margin was 8.2%, well below 14.4% in the year-ago quarter. To some extent, this indicator is beneficial because it represents the expenditure on content production, which means that Netflix is gradually recovering and increasing its global content investment. In 2021, Netflix will pay about $17 billion in costs for content.
Behind the content arms race is competition, HBO and Disney both invested less than $3 billion over the same period, and Netflix is nearly six times theirs. However, the market to assess whether Netflix's content investment is reasonable, more will refer to the annual operating profit margin, in general, when the annual profit margin remains above 20%, then Netflix's operating conditions do not need to worry. Netflix expects an operating margin of 23% in 2022Q1 and 19%-20% for the full year. This standard means that Netflix's input-output ratio is healthy enough, and other streaming media, such as Disney, are difficult to break even if they can't spend as much money as Netflix for the time being. This is Netflix's long-term advantage.
Of course, this comes from the fact that Netflix's content accumulation quality + quantity are far ahead of Apple, Disney, and Amazon. But quarter-specific, the latest content is the most exciting for short-term data. According to Wedbush Securities, Netflix released 157 titles on Q4, including movies, new episodes and new seasons of existing episodes. This is a 20% increase over the same period last year. It was the highest in history, and apparently the lack of strength in the first quarter was due to the lack of up-to-date content.
Media analyst Michael Nathanson said: "2022 should prove that no company has a monopoly on high-quality content, and the time spent on any video-on-demand platform cannot be guaranteed." "It's certain that in the first quarter, Netflix didn't have a return from "Squid Games" or blockbuster titles, and 2022 will indeed usher in the fourth season of "Stranger Things" and the second season of "Bridgeton", but opponents like HBO have "House of the Dragon" — a prequel to "Game of Thrones" or the fourth season of "Westworld".
So Netflix went up the price. In the United States and Canada, where users are the most competitive, but also the most loyal, willing and capable of spending. Bearers think this will overdraft users' love for Netflix, but this question must be explored in conjunction with more factors, such as user stratification.
The price increase is good in the short term, can Netflix grasp this "double-edged sword"?
If the timeline is lengthened, Netflix's price increase is not news, because with the increase in content costs, labor costs, bandwidth costs and other aspects of expenditure, for most industries, it is impossible to maintain a relatively low price.
However, announcing price increases near the time of earnings release – on January 14, Netflix announced that subscription prices in the United States and Canada will rise by $1-2 / month – always remind the market of performance problems. Especially with very positive growth expectations given last quarter, the need for price increases is questionable.
On the day the price increase was announced, Netflix shares closed up 1.25%. However, on January 15, 2019, also before the earnings report, Netflix announced the biggest price increase since the launch of the company's streaming service - the average price increase in the US market was 13%-18%, resulting in a sharp increase in its stock price of 6.52% on the same day.
The market's first reaction is real, and users may still be able to accept Netflix after the price increase, but the price increase is a little closer to the upper limit with one use. It can also be seen from the history of price increases that the basic packages that anchor price-sensitive people have been very restrained, while the premium packages are more. Still, for the first time in history, Netflix is priced higher than HBO Max after the price increase, which is not a good sign, and the competition is more intense.
Netflix's price increase reveals at least two major problems. First, Netflix only has enough liquidity in the United States to increase its base camp - due to ARPU, the expectation of price increases will become catching a sheep "shearling". Second, compared with Disney, Apple or Amazon, even if the latter two are less urgent for the development of the streaming media business, Netflix lacks the support of other businesses - in addition to more high-quality content, it can only increase prices, which is why the market has speculations about live broadcasting and advertising, even if this is not in line with the original intention of Netflix and its founders.
Netflix CO-CEO Reed Hastings said in response to analysts' questions about increased competition: "I don't want to put too much emphasis on the reasons for this, it is true that the market competition is more intense than ever, but we have been competing with Hulu and Amazon for 14 years, so we can't say that there has been any substantive change in competition." "But that doesn't convince everyone. London-based research firm Ampere Analysis expects companies such as NBCUniversal parent company Comcast and Disney to spend $22.7 billion and $33 billion on sports rights this year, at least, emphasizing that the homegrown Netflix does lack broadcast content, and it is also working on it.
On Jan. 20, Disney named company executive Rebecca Campbell as head of the newly established International Content Creation Center, which aims to expand regional content for streaming services. When Disney began imitating Netflix for localized content development, that concern was amplified. Disney's IP development, Apple's hardware, Amazon's e-commerce and cloud services, these are competitors' blood transfusion channels. Netflix, on the other hand, has to subsidize emerging markets with the regions with the strongest revenue capacity – the cost of content development in emerging markets is indeed very low, but the corresponding revenue capacity growth is also slow.
However, it would be unwise for Netflix to lose confidence in this accident. Netflix's problem may be that the valuation and expectations are too high, but in addition to content reserves, Netflix is also actively trying to introduce interactive games or new IP development, such as last November, Netflix game platform new including "Stranger Things 3: Game" including five new mobile games. That can't happen overnight, it said, and Netflix is trying to build its own ecosystem. So, if one day, Netflix's traditional growth story really can't be told anymore – this is doomed in the future, and there is a cap on streaming penetration – the market will re-evaluate Netflix's path.
If users are really willing to pay more time or membership fees for Netflix, then it can still be a darling. As for how to observe the outside world's ideas, it depends on when the trend of bottoming out appears in the secondary market. The market is loyal to revenue, users are loyal to content, and Netflix is loyal to streaming itself. As Ted Sarandos, Netflix's co-CEO & chief content officer, put it: "Many years ago, we made a more important judgment that more and more TV series and movie viewers will gradually watch content through Netflix and Netflix-like platforms, and this judgment has not changed." ”