early November, netflix (NFLX 8.46%) It fundamentally changed its DNA. The company, which has long touted its lack of commercials as a selling point, has rolled out an ad-supported streaming plan for $7 a month. It was perhaps one of the most controversial moves in Netflix’s history, one that gave both bulls and bears ammunition.
Bulls argued that the vast majority of longtime subscribers were unlikely to switch to cheaper ad-supported plans because they’re accustomed to commercial-free programming. Bears argued that cheaper is cheaper, and that Netflix was likely to see a wave of exits as viewers fed up with price hikes would revolt and switch to cheaper plans. .
It turns out that the subscriber sided with the bulls.
Image Source: Getty Images.
All ‘ads’ on Netflix this quarter
For the ad-supported first quarter, management expected Netflix to add a total of 4.5 million subscribers in the fourth quarter, while analysts expect 4.6 million.Result is far Exceeding expectations, net additions reached 7.7 million, bringing the global total to approximately 231 million.
“We believe branded TV advertising represents a substantial long-term revenue growth and profit opportunity for Netflix,” the company said in its quarterly letter to shareholders. The company further said that audience engagement on ad-supported plans is in line with members on comparable ad-free plans. This was better than the streaming pioneer expected.
Management also noted that there was “little switching” from other more expensive plans. support the claim that
Netflix also revealed for the first time that its ad-supported plans have “strong unit economics.” This is at least “as good as or better than comparable ad-free plans, generating increased revenue and profits.”Investors breathe a sigh of relief
That’s not to say it was all sun and roses. Netflix said that (my emphasis is on) that “advertising is still in its early stages, a lot to do,” specifically citing “better” [ad] Targeting and measurement. ”
the story of the tape
Netflix investors have long understood that subscribers are the cornerstone of the company’s performance, and additional subscribers have outperformed guidance in both revenue and operating profit, driving strong financial results. .
Fourth quarter revenue increased 1.9% year-over-year to $7.85 billion, more than double management’s forecast of 0.9% growth. The operating margin of 7% surged above the company’s forecast of 4.2%. Net income of $55 million was below expectations, but he was the result of non-cash charges of $462 million, unrealized losses on euro-denominated bonds acting as hedges. Without that fee, the profit would have been much higher than expected.
Netflix starts changing at the top
In a surprising move, Netflix announced that CEO Reed Hastings will move upstairs and take over the role of executive chairman. Former Chief Operating Officer Greg Peters will join Ted Sarandos as Co-CEO. In a blog post, Hastings said that “his set of complementary skills, deep knowledge of entertainment and technology, and track record at Netflix” uniquely qualified him for the role as co-CEO.
Hastings said the move is part of Netflix’s “succession planning,” noting that founders often take on the role of executive chair when “passing the CEO baton to someone else.” . The company also explained that the move “formalizes the way we’ve been doing it internally to the outside world.”
Netflix’s future remains bright
The news is relatively bullish from an investor’s perspective, with more growth drivers likely to emerge.
After testing a pilot plan in Latin America, Netflix plans to crack down on password sharing with the rollout of a “paid sharing” plan that will begin rolling out later in the quarter. Initial tests showed that although there were a small number of initial cancellations, these were well compensated for by the addition of standalone accounts from what the company called “borrower households.” Netflix said short-term engagement could be “negatively impacted” but would recover, similar to the pattern seen in Latin America.
Overall, Netflix’s performance seemed to confirm what the company had suspected. That means ad-supported tiers will lead to more subscribers, paid shared plans will boost memberships, and the company’s growth will resume.
Oh did I mention it while it was recovering a bit From all-time lows, Netflix’s stock remains a relative bargain, selling at just four times its futures sales? This is especially true given the
Good day to be a Netflix investor.
