Netflix earnings call: Paid sharing key to ramping revenues in 2023
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Netflix (NASDAQ:NFLX) had dropped to a 6% aftermarket decline Wednesday as it released its executive interview tied to second-quarter earnings, where revenue guidance disappointed even as the streamer showed a ramp up in new subscribers -- and the stock continued to fall as the evening wore on (dipping to an 8%-plus drop), though execs painted a picture of a company pivot going according to plan.
That's despite a rare disruption for Netflix and other program producers: an improbable Hollywood double strike (with writers and actors walking off the job and picketing).
Netflix (NFLX) may be in a better position than traditional studios in the work stoppage given different production timelines and a long pipe of content in production.
"This strike is not an outcome that we wanted," said co-CEO Ted Sarandos, who noted he grew up in a union household. "We've got a lot of work to do. There are a handful of complicated issues; we're super committed to get into an agreement as soon as possible, one that's equitable, and one that enables the industry and everybody in it to move forward into the future."
Attention quickly moved to the company's newest revenue drivers, though: a growing advertising-supported tier and a successful password crackdown (paid account sharing) that's moved out of the test phase and is going worldwide.
Despite the fresh rollout of paid account sharing -- where households are prompted to pay a smaller add-on fee for "extra members" or help port them to their own full Netflix account -- "the business impacts of that product experience will roll in over several quarters, so it's not an overnight kind of thing," co-CEO Greg Peters told interviewer Jessica Reif Ehrlich, noting "in part the interventions are applied gradually. And in part because some borrowers won't immediately sign up for their own account, but will do so next month or three months or six months or maybe even longer down the line."
Still, they're pleased with how average revenue per member is working out with retention in the password crackdown.
"Generally what we see is these are well qualified members," Peters said. "So in other words, they are choosing plans and are engaging at rates, have retention characteristics that generally look like higher-tenure members."
And that's important for revenue outlook, Chief Financial Officer Spence Neumann said. "So most of our revenue growth this year is some growth in volume through new paid memberships, and that's largely driven by our paid sharing rollout," Neumann said. "It is our primary revenue accelerator in the year, and we expect that impact ... to build over several quarters."
That's not to leave out steady growth in its low-priced ad-supported tier. The execs gave no indication that things have changed from last quarter, when average revenue per member on the advertising-supported tier was at least as high as that on the standard ad-free tier.
Netflix had said last year that at an inflection point, free cash flow would become a focus for coming years -- and the company posted stellar results on that front, with free cash flow jumping to $1.339B from a year-ago $13M. The 2023 forecast came in even stronger, bumping to $5B from a previous $3.5B.
Neumann attributed that to early success of the paid sharing rollout as well as moves in production timing -- but also the impact of the Hollywood strikes. That means despite the significant increase in forecast for 2023, that might mean some "lumpiness" in 2024 free cash flow.
"But more broadly, we're past that most cash-intensive phase of building out our original programming strategy," Neumann said. "So we'll have some near-term lumpiness, but if we apply a multi-year lens we expect a positive and growing free cash flow trajectory in the years ahead."
The results of upbeat cash flow now and in the future naturally lead to questions about whether Netflix would look into mergers and acquisitions to grow. There are a "lot of distressed assets in media land," Reif Ehrlich said.
"Some of those assets are stressed for a reason," Sarandos countered.
"We have traditionally been very strong builders over buyers, and that really hasn't fundamentally changed, but if there are opportunities that give us access to pools of IP that we can develop into and against that could be super interesting," he added.
As for selling any of a now-vast content library to others, Sarandos suggests that's not likely.
"We've always found that we offer this content to our members in a unbelievable value on Netflix now, and then almost anywhere else we'd put it, there's either a crossover and they otherwise have a Netflix account or a much smaller viewing base," Sarandos said. "So we think we're taking the right course in terms of offering the content to our members, and having it around even after its original run on Netflix."
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