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Netflix Management Talks Competition, Advertising, and Free Cash Flow

By Daniel Sparks - Jan 28, 2020 at 10:06AM

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Here are three must-see quotes from the streaming-TV specialist's CEO.

By the looks of Netflix stock's (NFLX 2.17%) paltry 1% gain over the past 12 months, some investors might mistakenly conclude that intensifying competition has stunted the underlying company's growth. But this is far from reality.

2019 was a record year for Netflix, featuring a 20% year-over-year increase in subscribers. This subscriber growth, combined with price increases, helped total revenue rise 28% year over year. Operating income for the year jumped even faster, climbing 62% year over year to $2.6 billion. 

To get a better look at the company's momentum and what management is saying about Netflix's prospects, check out the following three quotes from the company's fourth-quarter earnings call.

A girl eating popcorn while watching TV

Image source: Getty Images.

Netflix is upbeat about its long-term growth opportunity

First and foremost, investors should note management's continued confidence about the streaming-TV service's opportunity for continued growth even as new competition comes to market.

CEO Reed Hastings explained that engagement trends on the platform remained strong despite the launch of new services from both Apple and Walt Disney during the quarter.

[U]ltimately what drives our business is increasing member satisfaction and viewing. And what you also see in the US, what we saw across the board is that our viewing, our per membership viewing grew not just globally, but in the US through Q4 -- and [this] continues. So that bodes well for our long-term opportunity as long as we keep getting better.

Why Netflix wants to remain ad-free

Management also once again countered criticism from some industry watchers that the streaming service should launch a version of its service for a lower price (or for free) that is monetized through ads.

In addition to noting that the company doesn't want to have to compete against big players in the ad industry, such as Facebook, Alphabet, and Amazon, Hastings simply argued that, by remaining ad-free, it is avoiding increased scrutiny advertising platforms often see -- and it is keeping its business model simple.

[W]e think if we don't have exposure to that, the positive side is we're in a much safer place, we're not integrating everybody's data. We're not controversial that way. We've got a much simpler business model which is just focused on streaming and customer pleasure. So, we think with our model that we will actually get to a larger revenue, a larger profit, larger market cap...

Free cash flow should improve despite aggressive content spending

Finally, while it's been well documented that Netflix management believes it has reached peak negative free cash flow and that it expects its negative free cash flow to improve from negative $3.3 billion in 2019 to negative $2.5 billion in 2020, there's another narrative regarding this topic that deserves a closer look: Netflix believes it can move toward positive free cash flow without letting up on aggressive content spending.

"And so we're on the glide path slowly toward positive free cash flow," explained Hastings. "We're excited about that, but that's not coming from shrinking back our content spending. That's coming from the increase in revenue and operating income."

The Street may be overly focused on growing competition just as Netflix is hitting a key turning point in its business. Going forward, the streaming-TV giant will be able to invest heavily in blockbuster content while funding increasingly more of its expansion with cash from operations as opposed to tapping debt markets for capital.

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