Investors have low expectations heading into the first-quarter earnings report from Netflix (NFLX 3.04%). That selling period is usually a seasonal win for the streaming giant, thanks to the rising demand for TV content during the winter months in the U.S. However, its growth outlook has become cloudier lately as subscription gains have slowed in the wake of the pandemic.
The big question heading into Tuesday's announcement is whether Netflix can return to its pre-pandemic annual expansion rate or if, instead, the business is transitioning to a new phase of slower revenue gains paired with rising cash flow and profits.
With that big picture in mind, let's take a closer look at the results due out after the market closes on April 19.
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Subscription trends
Like many businesses that saw a big demand spike during earlier phases of the pandemic, Netflix is enduring a growth hangover today. It gained just 18 million new subscribers in 2021 compared to 37 million in 2020. This slowdown occurred despite a flood of new content releases later in the year, including some of the streaming giant's biggest global hits to date.
Co-CEO Reed Hastings and his team projected that the start of 2022 will be similarly sluggish, with subscriber gains landing at just 2.5 million compared to 4 million a year earlier. That soft guidance wasn't a matter of seeking to set low expectations just to set up an easily-beaten target, either. "We think it will be accurate," Hastings told investors in late January.
Management said that people aren't signing up for the service at the same rate as before the pandemic struck, although existing subscribers are staying engaged. We should get more clarity around those seemingly opposing trends in Tuesday's announcement.
Cash flow and margins
The news has been more uniformly positive on the financial side of the business. The operating profit margin is expanding nicely, reaching 21% of sales last year compared to 18% in 2020. And free cash flow is on track to be solidly positive in 2022 and for the foreseeable future.
Yet the short-term outlook isn't as strong. Netflix has been spending cash on new areas beyond its already expensive content budget. These include big acquisitions and a push into video gaming.
NFLX Operating Margin (TTM) data by YCharts
Watch for signs that these strategies are stressing cash flow in early 2022, but without threatening management's broader goal of internally funding the business this year. Operating margin gains might slow in 2022, too, while still trending higher by about 4 percentage points per year.
The new outlook
Wall Street will be focused on management's short-term outlook, given all the big questions about Netflix's growth potential. Ideally, some of the executives' confusion in late January will be cleared up by signup and engagement trends over the following few months.
Netflix was gaining between 25 and 30 million subscribers annually before the pandemic scrambled its demand trends. COVID-19 pulled forward some of its 2021 growth in 2020. But investors are eager to learn whether the company can take a step back toward its prior annual expansion rate after subscriber gains slumped to just 18 million in 2021.
