Streaming platform Netflix (NFLX.US) announced its financial results for the first quarter of 2024 after the U.S. stock market closed on April 18, 2024.
According to the announcement, whether it is user growth, revenue or profitability, Netflix has exceeded market expectations.
However, surprisingly, in the ensuing extended trading session, Netflix's share price fell sharply, falling by 6.32%. What is the reason for this unusual market reaction?
Finet believes that there are three reasons for this:
1) Netflix will no longer publish user data from 2025;
2) Lower-than-expected full-year revenue growth guidance: 15% revenue growth in Q1 and 16% revenue growth guidance in Q2, but full-year revenue growth expectations of only 13%-15% suggest a slowdown in the second half of the year;
3) Content spending remains at $17 billion.
Netflix's Q1 2024 performance
In Q1 2024, Netflix's revenue grew 15% year-on-year, driven by membership growth and pricing optimization, with ARM (average revenue per user) growing 1% year-on-year and 4% year-on-year in constant exchange rates, mainly due to fluctuations in foreign exchange rates due to high inflation in Argentina and a 75% depreciation of the Argentine peso against the US dollar.
During the period, Netflix added 9.33 million net paid memberships quarter-on-quarter, with net additions of 2.53 million in the U.S. and Canada, EMEA (Europe, Middle East and Africa), Latin America and Asia Pacific, respectively.
Paid membership reached 269.6 million at the end of March 2024, compared to the consensus of 264.2 million, with the U.S. and Canada and EMEA remaining member regions with 82.66 million and 91.73 million members, respectively, while Latin America and Asia Pacific also reached 47.72 million and 47.5 million, respectively.
In the first quarter of 2024, the average monthly revenue per paying member increased by 3.97% to $17.30 in the United States and Canada, while the average monthly revenue per paying member in EMEA and Asia Pacific increased by 1.58% and 0.55% to $10.92 and $7.35, respectively.
Netflix's revenue for the first quarter of 2024 grew 15% year-on-year, or 18% in constant currency, to $9.370 billion, higher than the consensus of $9.28 billion, driven by an increase in the size of paid members and an increase in average revenue per paying member.
In the first quarter of 2024, Netflix's operating profit rose 54% to $2.6 billion, mainly due to revenue beating expectations and the time difference in its content spending. Operating margin improved 7 percentage points to 28%. Earnings per share came in at $5.28, compared to $2.88 in the year-ago quarter, compared to an estimate of $4.49 and a consensus of $4.52.
Net cash inflows from operating activities were $2.2 billion and free cash flow was $2.1 billion in the first quarter, both unchanged from the year-ago quarter. During the period, Netflix spent $2 billion to repurchase 3.6 million shares. As of the end of March 2024, it had $7 billion in cash and cash equivalents.
Netflix provides an outlook
In the second quarter of 2024, Netflix expects revenue growth of 16%, compared to 21% if currency fluctuations are not accounted for. Net increase in paying subscribers is expected to be lower than in Q1, mainly due to seasonality. Global revenue per user is expected to grow year-on-year.
Netflix provided guidance for fiscal 2024, expects revenue growth in the range of 13%-15%, and raised its fiscal 2024 operating margin forecast by one percentage point to 25% from 24% in the previous year, mainly due to currency effects.
The company expects its full-year 2024 free cash flow to be approximately $6 billion, while cash content expenditures will not exceed $17 billion.
Netflix responds to the market's main concerns
In response to concerns about no longer publishing quarterly membership numbers from 2025:
Management said that Netflix's pricing strategy and package services are constantly changing, and pricing differences are gradually emerging in different regional markets, resulting in a decrease in the accuracy of the relevant data. To address this challenge, management decided to focus on a number of key business metrics, such as revenue, operating profit, net profit, earnings per share and free cash flow. In addition, introduce guidance on annual revenue bands and regularly update member data when the number of members reaches certain milestones to ensure that decisions are based on the most up-to-date and accurate information.
Why is the annual revenue growth of 13%-15%, compared to 15%-16% in the first and second quarters?
Management pointed out that the second half of 2023 will not be as impressive as the first half of 2023 will not be as impressive as the first half of the year due to its efforts to improve and enhance its core services over the past 18 months.
In addition, the continued strength of the US dollar had a negative impact on overseas revenues. However, for the full year, revenue still achieved healthy double-digit growth. Management said they will continue to strive to maintain double-digit revenue growth in the future and believe there is still significant room for growth. Specifically, Netflix has no more than 10% of the TV market share in each of the markets it operates, which means that there are still many households that are not yet Netflix subscribers. At the same time, Netflix's advertising business is also in its infancy and has huge monetization potential. Therefore, the management is confident that Netflix will be able to create higher value in the future.
Progress of the advertising business:
In the last quarter, Netflix mentioned two priorities for its advertising business: expanding its membership base and expanding its capacity for advertisers.
Q1 of this year saw good progress in both areas, with ad membership growing by 65% quarter-on-quarter (compared to nearly 70% quarter-on-quarter growth in Q3 2023 and Q4 2023), with more than 40% of registered users being ad accounts.
On the advertiser side, Netflix said it continues to focus on measurement solutions, including a new partnership between Kantar and Lucid on brand management and is building its own sales team.
In terms of long-term healthy growth:
奈飞表示要:
1) improve the diversity and quality of entertainment content;
2) product and marketing innovation;
3) Expand revenue and profit streams – In particular, expand the scale of the advertising business so that advertising revenue will be its main source of revenue in 2025 and beyond.
How will Netflix capitalize on the opportunities of generative AI technology?
Management emphasized that Netflix has been actively using cutting-edge technologies, such as machine learning, to lay a solid foundation for its recommender system over the past two decades. The application of these technologies enables Netflix to provide members with more accurate content recommendations, thereby improving user experience and satisfaction. Going forward, Netflix will continue to focus on optimizing and refining these systems with new technologies. At the same time, Netflix plans to create new tools for content creators to help them communicate their stories more efficiently and maximize the value of their creations.
summary
Although all performance indicators in the first quarter of 2024 were higher than market expectations, the guidance provided by management for future performance failed to convince investors, which is the main reason why Netflix's stock price has fallen instead of rising.
Looking ahead, Netflix's high content production costs and slowing user and revenue per user growth are the main concerns in the market. Whether Netflix can attract and retain users with high content production costs will determine its future growth.
In addition, the exploration of advertising business has not yet shown convincing results, which is also worth paying attention to.
Author: Mao Ting
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