“Thank God we’re done with shrinking quarters,” said Netflix Inc (NASDAQ:NFLX)’s chief operating officer Greg Peters in the streaming giant’s latest earnings call.
Better than shrinking, Netflix surpassed expectations by adding 2.4mln fresh subscribers in the quarter (after bleeding customers earlier in the year) and posting a year-to-date operating profit of US$5.4bn.
Regarding the bumper earnings, Geetha Ranganathan, media analyst at Bloomberg Intelligence said: “It may be a bit premature to say that Netflix has won the war (over the streaming services) but they are definitely in a strong position and will definitely be a leading service along with Disney and a handful of other platforms.
“The worst is behind them and the introduction of an ad tier is a positive catalyst that could broaden the addressable market and re-accelerate revenue growth.”
Good news all round for Nexflix, but it was what the company said of the competition that really stuck.
Fewer new subs? Netflix isn’t bothered
“As it’s become clear that streaming is the future of entertainment, our competitors – including media companies and tech players – are investing billions of dollars to scale their new services, but it's hard to build a large and profitable streaming business.
“Our best estimate is that all of these competitors are losing money on streaming, with aggregate annual direct operating losses this year alone that could be well in excess of US$10bn, compared with our US$5-US$6bn of annual operating profit."
It’s a shrewd move by Netflix to divert the conversation away from subscription numbers and towards cold-hard profit.
So much so that the company will cease providing guidance on subscription numbers altogether, despite being historically the most underscored metric in Netflix’s forecasts (Netflix will still release subscription numbers every quarter, it just won’t provide prior estimates).
The bottom line is, Disney+, may be outdoing Netflix’s new-user count sixfold, but only one of them is generating any actual profit.
Streaming is a costly game that is not meant for the faint of heart
Chalk it up to a combination of cheaper IPs that tend to go insanely viral (see Squid Games, Cobra Kai and Monster), fewer A-list actors to pay, and 12 years under its belt to get its margins in order.
That’s not to say that Netflix has a small production budget. Far from it.
“Streaming is a costly game that is not meant for the faint of heart. Netflix itself has a US$17bn content budget and has for years been criticised for losses and high cash burn,” said Ranganathan.
However, “they have finally turned that around with US$5-US$6bn in operating profit and now have multiple levers to increase profitability even further. I believe this is where we are going to see the shakeout where streaming services who are unable to generate sustainable profits will be forced to close down or consolidate making Netflix one of the few winners.”
Advertising pivot the right choice, say analysts
Advertising is clearly going to be primary driver of revenues going forward, even if the company conceded that short-term impact on the bottom line will be minimal.
Analysts at Wedbush are particularly upbeat on Netflix’s advertising pivot, stating: “(Netflix’s) ad-tier should limit churn going forward, while its content strategy appears to be smoothing out with greater discernment and a higher mix of original titles.
“As a result, we think Netflix is poised for significant free cash flow growth in the coming years.”
Wedbush consequently upped its NFLX share price forecast from US$280 to US$325.