Netflix ended its biggest year in company history with a bang, adding more customers than expected and saying it no longer needs to borrow money to build its entertainment empire.
The world’s leading paid streaming service attracted 8.51 million new subscribers in the final three months of the year, helped by the popularity of hit shows such as Bridgerton and The Queen’s Gambit.
That outpaced Netflix’s own forecast and the 6.06 million projected by Wall Street, and its shares rose 14 per cent in pre-market trading.
Winter Nights
The earnings report included two key milestones for Netflix: The company passed the 200 million-subscriber mark for the first time and said its cash flow will allow it to stop relying on debt to fuel its growth.
With $8.2 billion in cash – and a credit line that hasn’t been drawn down – Netflix said it no longer needs external financing. It is also considering stock buybacks, something it hasn’t done in about a decade.
A record
The pandemic has provided a huge boost to Netflix’s business, forcing people inside and limiting other entertainment options such as cinemas and concerts. The company added 25.9 million customers in the first six months of last year, and ended up adding 36.6 million customers in all – a record.
"It's accelerated that big shift from linear to streaming entertainment," Spencer Neumann, the company's chief financial officer, said on a call with investors and analysts on Tuesday.
Netflix has repeatedly warned that the surge in the first half of 2020 would limit its growth in subsequent quarters – what it calls the “pull-forward” effect. Neumann cautioned this would continue to affect growth in 2021, and Netflix gave a conservative estimate for the current quarter.
It expects to add 6 million new subscribers in the period, compared with an average analyst estimate of 7.45 million. But Netflix found more runway than expected in the latest period. Its growth during the last year dispelled two common critiques of the company.
Skeptics of Netflix have long identified its debt as a looming disaster, arguing an economic recession would cripple the company and cause customers to cancel subscriptions en masse.
Borrowing record
While Netflix has consistently reported profits, it had to borrow billions of dollars to fund its spending on new programmes. It had negative free cash flow of $3.3 billion in 2019, its worst on record. Since then, it has turned a corner. Free cash flow will be close to the break-even point in 2021, Netflix said Tuesday. Analysts had projected negative $619.7 million.
Against that backdrop, Netflix’s debt spree looks like a worthy investment. It borrowed some $15 billion to boost its market capitalisation by more than $200 billion.
Critics have also argued Netflix would suffer when rival media companies pulled their most popular titles from the service and created their own competitors. Yet Netflix posted its best performance yet in the same year that several new competitors entered the fray and Disney+ added 87 million paid subscribers.
“Our strategy is simple: If we can continue to improve Netflix every day to better delight our members, we can be their first choice for streaming entertainment,” the company said in a letter to shareholders.
“This past year is a testament to this approach.”
Netflix shares climbed as high as $570.79 in premarket trading. The stock rallied 67 per cent last year, but concerns about slowing growth had weighed on Netflix in 2021. Through Tuesday’s close, it was down 7.2 per cent since the start of the year.
“Investors come out of the fourth quarter incrementally more bullish on the potential of a powerful developing shareholder return story for Netflix in the coming years,” Evercore ISI analyst Lee Horowitz wrote in a note.
Analysts at JP Morgan Securities said the company is likely to begin share buybacks in the second half of the year.
International markets
Netflix, based in the Silicon Valley town of Los Gatos, California, is leaning more on international markets now that its home market of North America is largely saturated. The service has relied on Europe and Latin America to supply most of its new customers in the last few years, and is just starting to crack Asia.
More than 60 per cent of its customers now live outside the US and Canada, and 83 per cent of its new additions in 2020 came from abroad. Europe supplied 41 per cent of its new customers – almost 15 million people – while Asia added 9.3 million customers, the second most.
Netflix has thrived by creating pipelines of new programmes from all over the world that appeal to viewers outside of the native tongue. In the fourth quarter alone, Netflix released popular series in German, Korean, Japanese and French. The English-language The Queen’s Gambit and Bridgerton were both major hits for Netflix.
Global reach
The Queen’s Gambit was viewed by 62 million households in its first 28 days on the service, while Bridgerton is on track to reach 63 million accounts, Netflix said. But a newer show, released this month, underscores Netflix’s global reach.
Lupin, a French crime series starring Omar Sy, has become the second-biggest debut in the company's history. It is on track to be watched by 70 million households in its first 28 days on the service. This diversity of shows is what will help Netflix continue to grow, both at home and abroad, in the face of growing competition.
“We’re still a very small share of even just pay-TV penetration in most markets around the world and small share of viewing,” Neumann said.
– Bloomberg
