Netflix posts solid beat on Q3 2021 earnings and new subscribers
November 29, 2021
As the leading streaming service provider worldwide, Netflix (NASDAQ: NFLX) seems to always be in the spotlight. Its stock price has skyrocketed over the past decade, so naturally, investors can’t seem to wait for any fresh updates on the trajectory of the business. Luckily, the company just released its latest quarterly numbers for Q3 2021.
Here are five key takeaways from its third-quarter financial results that Netflix shareholders need to know.
1. Q3 results and Q4 forecast
In Q3, revenue grew 16% year over year to $7.5 billion from $6.4 billion, while operating income rose 33% versus the prior year quarter to $1.8 billion from $1.3 billion.
Revenue growth in Q3 was driven by a 9% and 7% increase in average paid streaming memberships and average revenue per membership.
Operating margin for Q3 amounted to 23.5% versus 20.4% a year ago.
The company added 4.4 million subscribers in Q3 2021 to end the quarter with 214 million paid memberships.
For Q4 2021, the company said it projects revenue to grow at 16.1% year on year to $7.7 billion.
It also forecasts an operating income of $500 million and operating margin to decline to 6.5% mostly due to its back-loaded big content release scheduled in the fourth quarter.
Lastly, the company expects to add 8.5 million subscribers in Q4 2021, consistent with Q4 2020 additions.
2. International fuels nearly all membership growth
Of the 4.4 million subscribers that Netflix added during the third quarter, 4.3 million came from outside the UCAN (U.S. and Canada) region.
For investors following the stock, this isn’t much of a surprise. Netflix is making a big global push since domestic growth has hit a wall. In the second quarter, the business actually lost 430,000 customers in UCAN, while adding 1.5 million overall.
Netflix’s internal ambitions are being fuelled by the monster successes of local-language content like La Casa de Papel (Money Heist in the U.S.), Lupin and Squid Game. Each of these series has become wildly popular all over the world, supporting management’s view that compelling stories transcend borders.
There is no better example of this than Squid Game, a unique Korean story that first captured the zeitgeist in Korea, then globally. Released on September 17, it has become Netflix’s biggest TV show ever. A mind-boggling 142 million member households globally have chosen to watch the title in its first 4 weeks, making the show the #1 program in 94 countries (including the U.S.).
Netflix is truly a global media business, thanks in large part to its competitive strength in producing great content. The company is currently producing local TV and film in a whopping 45 countries and have built deep relationships with creative communities around the world. These efforts should result in continued growth overseas.
3. There’s a change in how content success is measured
Netflix has announced it will use new metrics for reporting viewership. The company will start reporting hours viewed rather than the number of accounts that watched.
For example, the company’s current top film is “Extraction”, with 99 million accounts having watched at least 2 minutes of the title in its first 28 days on Netflix. Future reporting would put “Bird Box” as the top film, with 282 million total hours viewed in its first 28 days.
The company said in its letter to investors that the new metrics where engagement is measured by hours viewed is a slightly better indicator of overall success of its titles and members’ satisfaction. It also “matches how outside services measure TV viewing and gives proper credit to re-watching”.
While the change in metrics does shift the rankings a bit, favouring series that have multiple seasons and long episodes, it provides shareholders with more accuracy and transparency.
Peeling back the curtain even more, Netflix plans to release these metrics outside of its regular earnings releases, so that its members and the industry can better measure success in the streaming world.
4. The company still wants to grab more users’ attention
Netflix competes with a large set of activities for consumers’ time and attention like watching linear TV, reading a book, browsing TikTok, or playing Fortnite, to name just a few.
The company believes that it still has a lot of opportunity for growth, as it has less than 10% of U.S. television screen time, according to Nielsen, in its largest and most penetrated market.
(Source: Q3 2021 shareholder letter)
Getting into gaming could bring Netflix users to spend more time on the platform, outside of watching traditional shows or films.
The company said it has begun testing its games in select countries, but it remains very early days for this initiative.
The games will be a part of Netflix subscriptions and will not include advertisements or in-app purchases.
5. Cash flow and capital structure
As far as free cash flow is concerned, after breaking even on this figure in 2021, management firmly believes that Netflix will be free cash flow positive on an annual basis in 2022 and beyond.
As a result, despite having $14.8 billion of long-term debt on its balance sheet, the company foresees that it will no longer need external financing to fund its day-to-day operations.
Additionally, the business is on track to generate a 20% operating margin for this full year. In the past, leadership has guided to a three-percentage-point expansion of the operating margin in any given year. So, with increasingly profitable days ahead, it is not surprising that Netflix no longer needs to raise debt.
This is a dagger in the heart for Netflix bears who have been knocking the business on its cash-losing operation. But with the company turning the corner financially, Netflix even has excess cash that can be given back to shareholders via repurchases, which it has started doing earlier this year.
In summary, it was a positive quarter for Netflix, and investors have a lot of reason to be optimistic about this streaming leader.
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.