Netflix (NFLX. O) $Netflix. US Released the first quarter of 2022 financial report in the early morning of April 20, Beijing time. Following the net increase in user guidance thunderstorms in the last quarter, this time Netflix rolled over and upgraded, and the number of users in the quarter directly decreased month-on-month!
Although there are unexpected factors in the suspension of services in Russia (about 1 million Russian users, 700,000 users in the first quarter were affected by renewal), it is still worse than the expectations of the head agency. On the Q1 program list, Netflix launched 59 new dramas and 22 old dramas to return, which is richer than the content of the same period last year (43 new dramas + 19 old dramas), but it still failed to save the headwind period of "out of the epidemic dividend" + "facing the comprehensive upgrading of competition".
In the case that the number of users is not seen, the company's continuous price increase in many places seems to be telling the market:
High growth is gone, and the future of Netflix will enter a low-speed but more profit-seeking mature stage.
Specifically, the operating indicators of performance:
(1) Factors that led to the after-hours plunge of 25% - user growth this quarter and guidance for the next quarter, for the first time suffered negative growth.
The number of users in the first quarter fell by 200,000 sequentially, and although there was a sudden reason for the suspension of services in Russia (involving a decrease of 700,000 users), it was still too far from the guidance of 2.5 million growth and market expectations. In addition, the user guidance for the second quarter "continue to decline by 2 million" is also a big disappointment to the market, and everyone generally expects user growth in the range of 1-2 million.
Dolphin Jun believes that after the gradual lifting and liberalization of the global epidemic, online consumption has suffered a lot of negative impacts. In addition, inflation has also restricted consumption power to a certain extent, and the overall upgrading of streaming media competition has made Netflix chaotic.
(2) Total revenue in the first quarter was US$7.87 billion, an increase of 9.8% year-on-year, and the growth rate slowed significantly compared with recent quarters. Excluding international operations affected by foreign exchange movements, revenue growth was 14%. The company's revenue growth guidance for the second quarter is also about 10%, and under the decline in users, revenue will be mainly driven by the price increase effect.
In the specific business, in addition to the "steady" decline of the DVD business, the subscription revenue increased by 10% year-on-year, and it seems that it is also entering the "maturity period" in stages.
If you look at the chain comparison, the growth of subscription revenue in the first quarter was mainly based on price increases, and multiple factors led to a stagnation in user growth. Considering that more and more competitors enter the market and the pressure continues to increase sharply, Dolphin Jun believes that if the price increase continues to intensify the user's "empathy" in the future, the marginal benefit of future price increases on revenue growth will be reduced, and Netflix may be "forced" to accelerate into the mature period of low-speed growth.
(3) Operating profit in the first quarter was US$1.97 billion, and the profit margin of 25% was significantly improved from the previous quarter, mainly due to cost optimization. However, management has previously guided the full year 2022 margin in the 19%-21% range, with the impact of foreign exchange changes dominating. Therefore, the profit situation in the first quarter should be the best time of the year.
(4) After the release of profits, the cash flow situation is also much better, and the free cash flow FCF under Non-GAAP in the first quarter was $800 million. Last quarter, management set a goal of positive free cash flow in 2022, so the pressure in this regard will also make the company more cautious in operating expenses and foreign investment.
The comparison between other operating indicators and market expectations can be referred to the following figure:
Longbridge Dolphins Overall View:
As the originator of China's long video cultists competing to imitate, it seems that it is difficult to escape the strange circle of chaos on the track. In the short term, although there is a marginal change in the impact of the unsealing of the epidemic, the competitors who continue to pour in and increase investment are further confirming that the streaming media track does not actually have higher and higher barriers, and users are "loyal" to high-quality content, but "affectionate" to the platform.
At the same time, users are picky and can never be satisfied, to retain the user's heart, only constantly please the user (invest in more boutique content, or have a price advantage), otherwise users can easily transfer to competitors, the way of monthly payment makes the cost of "betrayal" very low.
Therefore, streaming media are easy to fall into the "burning money" content arms race, and the scale benefits of the Internet economy will not appear on the streaming media track. The final competitive landscape is often the oligopolistic competition of many giants, each giant has a place in its own content field and market, and the absolute leader era of Netflix in the past decade will never return.
Or the sentence of last quarter's earnings report review: long videos are difficult to deserve long-term funds, and there is only a short-term opportunity to participate with the content cycle.
Superimposed on the suppression of the macro environment, Netflix's first half is destined to be gray, the funds that prefer growth may be gradually withdrawn, and perhaps at the right price position, Netflix may usher in a value investor who is more willing to see the continuous release of profits.
Specific data for this financial report
First, the first decline in users, the first half of the year a big headwind
Netflix's global subscribers in the first quarter were 222 million, with a net loss of 200,000 sequentially, which was too far from the 2.5 million expected by management guidance and market expectations. For the guidance for the second quarter, a 2 million month-on-month decline, it is another earth-shattering thunder. Although the second quarter itself is an off-season, two consecutive quarters of user decline will also make the market re-examine the core barrier value of Netflix.
In absolute terms, only the Asia-Pacific region grew in the first quarter (Japan, India, Southeast Asia, and Taiwan were better), and other regions were declining, and macroeconomics, price changes, and competition were all impact factors. Among them, the loss of users in the United States and Canada is the most obvious, in addition to the high market penetration rate and no room for growth, the price increase at the beginning of the year is also one of the factors that lead to the reduction of subscriptions for users. Although the content of the first quarter is not scarce, compared with the same period last year, the current Netflix can be said to be still in this round of content cycle.
For example, the "Bridgerton" series, which has been on fire for two years, is still the longest-watched English series in Netflix's history, and "Inventing Anna" is also excellent. In addition, the documentary "Tinder Swindler" and the movie "The Adam Project" were more successful in the first quarter, and the ratings were not weaker than the fourth quarter of "Red Notice" and "Don't Look Up", but from the results, it did not bring many new users to Netflix.
Although the company has put part of the "pot" on the head of the "shared account", Dolphin Jun believes that the core is still two factors:
(1) On the one hand, the global unblocking, offline activities occupy more of the user's time and consumption, while high inflation will also weaken the user consumption level.
(2) On the other hand, peers have increased their full horsepower on content, especially since the second half of last year, traditional film and television giants are also entering the market, which we guess will also bring more growth pressure to Netflix.
(3) In addition, like last year's Chinese market, the erosion of short videos (Tiktok, YouTube Shorts, etc.) on the user market should not be underestimated.
(At present, Amazon, Disney, Warner and other giants have not yet released financial reports, follow-up we will follow up on financial report reviews, observe the competition of streaming media, please pay attention)
Since the second quarter of last year, Dolphin Jun has been emphasizing the problem of streaming media competition, not only in seeing Nielsen's share of user time, Netflix's cake is constantly being eroded by peers (Disney, Apple, Amazon, YouTube, etc.), but also seeing these competitors continue to increase their content investment. In last quarter's giant review "Consumer Internet Roll King Battle, Meta, Google, Netflix Fight Bayonet", Dolphin Jun once again expressed concern, compared with technology giants Amazon, Apple, traditional film and television giants Disney, Warner, Paramount, etc., Netflix does not have an advantage in the capital surplus. At the same time, the strength of other giants in content creation is not low, and the copyright in their hands is also very sufficient. Even technology giants with no background, such as Amazon and Apple, can quickly fill the gap by "buying, buying, buying".
For the next few quarters of 2022, due to the continuous actions of opponents, we have more concerns about the competitive situation facing Netflix:
a. Apple TV+'s $25 million film "CODA" won this year's Academy Award for Best Picture.
b. Amazon's Prime Video plans to invest $1 billion to shoot the five seasons of The Lord of the Rings, which is scheduled to air on September 2, 2022, and the first season has now been filmed.
c. After Amazon acquired MGM Studios for $8.5 billion, it immediately announced the launch of the variety show "007 Road".
Paramount's Halo hit the top spot when it was released at the beginning of the month, and Paramount+ aims to reach 100 million subscribers by 2024.
e. Discovery's Discovery Channel and streaming have 22 million users, and on April 8, Discovery bought a 29% stake in Warner and merged to form a new company, Warner Bros. Discovery, so with Warner HBO MAX's 73 million, nearly 100 million subscriber subscriptions, also has the strength to compete with Netflix and Disney.
Therefore, no matter how long the negative impact of short-term marginal changes will last, from a long-term point of view, Netflix is gradually falling into a "passive defensive" situation, and in the absence of a second growth curve, Netflix has to gradually enter the mature period of vulgar growth.
Second, content spending continues to slow
Under the obvious pressure of revenue growth, and possibly affected by the Omicron epidemic since the end of last year, Netflix has also shown a short-term slowdown in content expenditure (streaming content cash expenditure). As of the end of the first quarter, the overall content asset scale was 31.2 billion, a significant contraction in new investment from the previous quarter.
Judging from Netflix's existing content assets, the proportion of self-made content is still rising, and has increased to more than 55%. After global content companies have personally gone down or cooperated with giants to get involved in the streaming media track, the possibility of Netflix obtaining their authorized content will become lower and lower in the future, so the proportion of self-made content is expected to continue to rise.
Third, the growth driver of mature markets is only "price increase"
In the first quarter, the amount of single-user payments in different regions increased by different margins except for the Asia-Pacific region.
For areas with high penetration rates such as the United States and Canada, the United Kingdom, and Ireland, Netflix's approach is to speed up the frequency of price increases. Following the last round of price increases in October 2020, Netflix raised prices again across the board at the beginning of this year. Compared with its peers engaged in promotions, Netflix's actions seem to be somewhat different and forced. Netflix, which has no financial advantage and no second curve, needs to squeeze the realization value of mature markets to provide "ammunition" for market competition in emerging regions (which is also the main source of contribution that the company believes will be the long-term revenue growth in the future). But this also makes Netflix in mature markets, compared with its peers, the price advantage is getting weaker and weaker.
Fourth, the demand for profit and cash flow will become higher and higher
In the first quarter, Netflix's gross profit margin returned to normal levels, and marketing investment was also significantly restrained, so that more profits were released. However, management's guidance on operating margin for 2022 was in the 19-21% range last quarter, so it is expected that margins will weaken in the next few quarters as the content schedule changes.
But for Netflix, competing with its peers requires long-term and sufficient funds. As of the end of the first quarter, Netflix's long-term debt is close to 15 billion, holding 6 billion in cash, that is, net debt is 8 billion, compared with its peers, Netflix is not very generous, and there is no new repurchase of the company's shares this quarter.
After completing two consecutive acquisitions in the first quarter (Eternals' special effects company Scanline and game studio Boss Fight Entertainment), the acquisition of a Finnish game studio Next Games will be completed in the second half of the year, so standing at the moment, although the competition from peers is fierce, Netflix will not be less eager for profits and cash flow.