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Netflix (NFLX) blew away expectations in Q1, reaching 270 million members.
From the shareholder letter:
“With more than two people per household on average, we have an audience of over half a billion people. No entertainment company has ever programmed at this scale and with this ambition before”
This global reach, combined with a relentless focus on content, personalized recommendations, and building passionate fanbases, creates the ultimate engagement machine.
So, how is Netflix keeping competition at bay?
Today at a glance:
Netflix Q1 FY24 overview.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
1. Netflix Q1 FY24
Netflix's revenue growth depends on two main factors:
👨👩👧👦 Paid Memberships: The total number of users paying for the service.
💵 ARM (Average Revenue per Membership): How much revenue they generate per subscriber.
Metrics shift:
Starting in 2025, Netflix will stop sharing membership and ARM and focus on revenue and operating margin as its primary success metrics. New initiatives like tiered pricing, the password-sharing crackdown, and advertising make subscriber numbers less indicative of the company's performance.
This management team prides itself on transparency, so hiding key metrics undercuts the message. Nonetheless, we’ll still get additional data on engagement, like the weekly top 10 or the bi-annual report on the most popular titles.
Membership surge:
Since May 2023, Netflix has cracked down on password-sharing in the US and parts of EMEA. It has led to a surge in new sign-ups.
270 million paid memberships at the end of Q1 FY24.
9 million added in Q1 (~5 million beat) and +16% year-over-year.
This growth was fueled in part by its ad-supported plan and recent efforts to curb password sharing.
North America now accounts for 31% of Netflix's memberships, down from 45% five years ago. This demonstrates the success of their international expansion. Q1 growth was strongest in APAC (+20% Y/Y) and EMEA (+19% Y/Y).
ARM growth
ARM was up 1% year-over-year, or 4% in constant currency.
October price hikes in the US, France, and the UK drove this increase.
While price hikes usually temporarily increase churn, the negative reaction tends to be short-lived. Judging by the addition of nearly 3 million net new members in North America in the past two quarters, the price hike was digested quickly.
Income statement:
Revenue: +15% Y/Y to $9.4 billion ($0.1 billion beat).
Operating margin: 28% (+7pp Y/Y) (2pp beat).
Earnings per share (EPS): $5.28 ($0.76 beat).
Cash flow:
Operating cash flow: $2.2 billion (24% margin, -3pp Y/Y).
Free cash flow: $2.1 billion (23% margin, -3pp Y/Y).
Balance sheet:
Cash and short-term investments: $7.0 billion.
Debt: $14.0 billion.
Q2 FY24 Guidance:
Revenue: +16% Y/Y (or +21% Y/Y in constant currency).
Operating margin: 27% (+4pp Y/Y).
So what to make of all this?
Revenue and margins were ahead of guidance. Revenue grew +18% in constant currency, accelerating for the fourth consecutive quarter. Paid membership additions were the main driver.
Netflix's guidance for Q2 FY24 shows more acceleration, with a forecasted 21% Y/Y revenue growth in constant currency.
However, the outlook for FY23 is only 13% to 15% growth. Management anticipates a slowdown in the back half of the year. Paid sharing started in Q2 2023 in the US, making the second half a harder comp.
Operating margin guidance was raised to 25% (from 24% previously), implying more margin expansion. Netflix has a very scalable business model with no near-term margin ceiling.
Free cash flow in Q1 FY24 was $2.1 billion. Management still expects $6.0 billion in free cash flow in FY24 and a cash content spend of $17 billion.
Management bought back $2.0 billion worth of Netflix shares in Q1, slightly less than the $2.5 billion in Q4 FY23.
2. Recent business highlights
Let’s take a look at the initiatives moving the needle.
🏎️ From docuseries to live sports
Netflix has repeatedly pushed back against live sports to focus on evergreen content like the drama and storylines around sports. Docuseries like Formula 1: Drive to Survive have been very effective. In case you missed it, we discussed the Netflix effect on F1 last week.
Management recently pivoted, embracing live events as a way to drive engagement. For example:
The Netflix Cup (2023): Cross-over golf competition between F1 drivers and professional golfers.
The Netflix Slam (2024): Tennis exhibition game between Nadal and Alcaraz.
Jake Paul vs. Mike Tyson (2024): Upcoming exhibition boxing match.
WWE Raw (2025): Netflix’s $5 billion 10-year deal will take over WWE’s weekly show Monday Night Raw next year.
The new focus on live content to create cultural moments is in its early days. However, if successful, it could be a significant growth driver.
🎮 Netflix Games gaining traction
Since November 2021, Netflix subscribers can download exclusive games on the App Store at no additional charge. Mike Verdu (a former EA and Facebook executive) leads this initiative.
🧨 GTA ignited growth: In December, Netflix launched its biggest games yet with the mobile port GTA The Trilogy - The Definitive Edition, which includes GTA 3, GTA Vice City, and GTA San Andreas.
📱 An expanding catalog: Netflix recently added high-profile titles like Football Manager 2024 (SEGA) and Farming Simulator 23 (GIANTS Software) and an exclusive iOS port of Hades (Supergiant Games).
Since all these games come at no additional charge, downloads are the main measure of success. According to estimates from Appfigures:
GTA San Andreas reached ~12 million downloads so far (5 million in Q1 2024).
Football Manager 24 crossed 5 million downloads (2 million in Q1 2024)
Hades reached 251K downloads on iOS in less than two weeks.
More than a GTA story: I partnered with Appfigures to create the chart below. They shared with me estimates for Netflix Games downloads since 2021. GTA The Trilogy alone generated 11 million downloads in Q4 2023 and 7 million in Q1 2024. Excluding GTA, downloads are up nearly 80% year-over-year as the catalog expands.
Monetization ahead: The Wall Street Journal reported that Netflix is exploring game monetization through in-app purchases or ads. Mobile games are a juicy market, expected to hit $111 billion in 2024, as discussed in our review of the console wars.
Bigger games? A Netflix job for a game director for an high-budget PC game was spotted online. The company has reportedly spent an estimated $1 billion on acquiring gaming studios and investing in its gaming business.
Games have a much higher ceiling in revenue per paying user. So, Netflix wouldn’t have to convert a significant portion of its 270 million subscribers to see meaningful results.
🔒 Netflix's Secret Weapon: Long-Time Subscribers
Streaming services know a simple truth: the longer you stick around, the less likely you are to leave. A recent Antenna analysis confirms this, showing churn rates (the percentage of subscribers who cancel) drop significantly after the first year.
For Premium SVOD services (Subscription Video on Demand), churn plummets from nearly 9% in the first year to just 4% in year two and beyond.
This 'tenure advantage' is where Netflix truly shines. As the streaming OG, most of its users have been loyal customers for over four years. This translates into an impressively low 2% monthly churn rate, significantly better than the industry average of 5.5% (estimated by Antenna).
📺 The ad tier is not yet accretive
Netflix launched its ad-supported plan in November 2023, with 5 minutes of advertising per hour. The $6.99/month plan generates more revenue than its standard $15.49/month plan in the US, thanks to ad revenue more than compensating for the lower price.
So, how is it going?
Ads memberships grew 65% quarter-over-quarter (after two quarters of roughly 70% quarter-over-quarter growth).
The ad plan already accounts for 40% of sign-ups in available markets.
Monetization is still lagging as management builds up the sales capabilities. So, revenue growth will take some time to materialize. Scale is the top priority when offering advertisers a competitive product.
This initiative could be the primary growth lever in 2025, with a lower entry point for new members and a higher ARPU potential.
🔒 Paid sharing driving growth
Netflix began cracking down on password sharing in Q2 2023, limiting accounts to a single household in the US (with the option to add an extra home for $2.99). This move aims to convert those using shared passwords into paying subscribers.
Estimated impact: Management estimated that over 100 million households used shared passwords. The strong subscriber growth in 2023 supports their hypothesis.
Growth potential: JPMorgan believes 62% of password borrowers could convert into paying members, potentially adding 36 million subscribers in 2024.
3. Key quotes from the earnings call
Co-CEO Greg Peters on the decision to stop sharing memberships in 2025:
“This change is really motivated by wanting to focus on what we see are the key metrics that we think matter most to the business. So we're going to report and guide on revenue, on OI, OI margin, net income, EPS, free cash flow.”
Co-CEO Ted Sarandos on the importance of engagement:
“We believe it's the single best indicator of member satisfaction with our offering, and it is a leading indicator for retention and acquisition over time. So happy members watch more, they stick around longer, they tell friends, which all grows engagement, revenue and profit, our North Stars.”
CFO Spencer Neumann on the opportunity:
“We're less than 10% of TV share in every country in which we operate. There's still hundreds of millions of homes that are not Netflix members and we're just getting started on advertising.”
4. What to watch looking forward
🤴 Content is king
Netflix's massive reach, targeted promotion, and personalized recommendations fuel its ability to capture the Zeitgeist.
From the shareholder letter:
“Our trailers generate over 6B impressions every month on Netflix — more than 40x what they get on YouTube.”
Netflix had the number one original series in nine of the first 11 weeks of the year.
High-performing titles in Q1 included:
Griselda (66.4 million views).
The Gentlemen (61.0 million views).
3 Body Problem (39.7 million views).
Avatar: The Last Airbender (63.8 million views).
In addition, the movie Society of the Snow (98.5 million views) became the second most popular non-English language movie ever.
And it’s not just about Netflix originals. A show like Suits, acquired by Netflix in 2023, was the most-watched program of the year. Content creators recognize Netflix as a critical platform for promoting projects, even those late in their lifecycle. That’s why you can find movies like Dune (Warner Bros.) on Netflix ahead of the Part II release in theaters.
👸 Engagement is queen
Engagement is the north star because it bleeds into all performance metrics:
Improved user retention (commitment to ongoing shows).
Lower customer acquisition (via word of mouth and awards).
Higher revenue per membership (via low churn on price hikes).
I have yet to find a better proxy for engagement than Nielsen’s monthly market measurement of US TV time. It shows how Americans spend their TV time across streaming, cable, broadcast, and other categories (linear streaming, gaming).
According to Nielsen, streaming accounted for 38.5% of US TV Time in March 2024, representing a 4.5-percentage-point increase year-over-year.
YouTube has been a critical factor, with a 9.7% market share, up from 7.8% a year ago. Alphabet’s management regularly mentions the living room as a crucial growth initiative. Note that Nielsen’s streaming segment excludes YouTube TV and Hulu Live.
In March 2024, Netflix represented 8.1% of TV time—more than Hulu, Prime Video, and Disney+ combined. It was up from 7.3% a year ago, an impressive achievement relative to other SVODs.
While YouTube holds the overall streaming crown in the US, Netflix maintains a significant lead over direct streaming competitors. The streaming market is growing rapidly, and Netflix is well-positioned for continued growth as it holds its share of an expanding pie.
With its foray into live content, expanding game offerings, and continued investment in diverse global content, Netflix has many avenues to boost engagement and deepen monetization.
Stay tuned for updates on other streaming giants in the coming weeks. 🍿
That’s it for today!
Stay healthy and invest on!
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Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long NFLX, GOOG, and ROKU in the App Economy Portfolio, where I share my ratings (BUY, SELL, or HOLD) with members.
So markets are overreacting today? Forward PE is still pretty high..