Netflix beats expectations as Squid Game helps drive subscriber numbers higher

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Netflix Inc (NASDAQ:NFLX) reported a lot more new subscribers and higher profits than expected but said profit margins will be crushed in the next quarter as it ramps up spending on new shows.


The streaming giant added a net 4.4mln paid subscribers in the third quarter, compared to 2.2mln in the same period a year ago and well above the 3.8mln that Wall Street analysts expected.


With growth driven by the Asia Pacific region, this meant it ended the quarter with 214mln paid ‘memberships’.


Revenues were US$7.48bn, roughly as expected, and due to lower marketing spend fed through to net income of US$1.45bn and diluted earnings per share of US$3.19, which smashed the average EPS forecast of US$2.56.


Netflix said the higher number of new subs was a result of stronger slate of new shows, following two quarters where it was “lighter than normal” due to the pandemic.


Shows in the quarter that drew in the viewers included the record-breaking Squid Game from South Korea. Since being released on 17 September it has become the group’s biggest-ever TV show, with 142mln households having watched in its first four weeks. It is the number-one show in 94 countries. Other winners included the fifth season of Money Heist and the third of Sex Education.


The backloaded fourth quarter is expected to be the strongest in terms of viewing content (including series like The Witcher, You, Tiger King and Cobra Kai, and films such as Don’t Look Up, starring Leonardo DiCaprio, Jennifer Lawrence, Timothee Chalamet and Meryl Streep) but will result in greater content spending and operating margins collapsing from 23.5% to just 6.5%.


Full-year cash flow is expected to be around breakeven, despite further outflows in the final quarter, with revenue seen rising 16% year-on-year to US$7.7bn.


Netflix said it has begun testing its new video games offering in certain countries.


“It remains very early days for this initiative and, like other content categories we’ve expanded into, we plan to try different types of games, learn from our members and improve our game library.”


During the quarter Netflix bought games developer Night School Studio to help build the group’s game development capabilities.


Looking to 2022, assuming no new large-scale production shutdowns, management said they expect a more normalized content slate, with a greater number of original releases compared to 2021 and a release schedule that is more balanced over the course of the year.


Netflix shares are expected to open 1.4% lower on Wednesday, based on after-market trading overnight.


Analyst Nicholas Hyett at Hargreaves Lansdown said there was something for the bear and the bulls in the results.


“Netflix is rightly proud of delivering something for everyone, and these results are no exception. Whether you’re a bull or a bear – there’s something for you to latch onto.”


For those more bearish about Netflix’s future, he said guidance for next quarter’s profits will be firmly in the frame as margins are squeezed.


“The likes of Leonardo DiCaprio, Jennifer Lawrence and Dwayne Johnson do not come cheap it would appear. If this is the kind of big budget spending the group now needs to keep up with rivals that is bad news for long term profits.”

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