Netflix (NFLX +0.96%) had a lot of good news for investors when it reported its fourth-quarter earnings results.
The streaming leader produced subscriber growth that was much better than expected, adding 7.66 million net new subscribers. It added subscribers across every region. Those subscribers helped generate $7.85 billion in revenue for the quarter, in line with expectations. Although earnings fell short, in part due to currency headwinds, investors were very pleased with the results.
But investors must always look forward, and there are a lot of important takeaways from the earnings report. Here are five of the biggest.
1. A new co-CEO
Reed Hastings is stepping down from his role as co-CEO after leading the company for 23 years.
Greg Peters, the former head of product and chief operating officer, will replace Hastings, co-leading the business with Ted Sarandos. Sarandos was promoted to co-CEO in 2020 and still heads the content business.
Peters has been instrumental in standing up and rolling out Netflix's new ad-supported tier in the three quarters since management made a surprise announcement during its first-quarter earnings call last year. He says investors shouldn't expect any big changes in how he leads the company compared to how things worked under Hastings. The three -- Peters, Sarandos, and Hastings -- have worked closely for a long time.
The move should help keep Peters' talent at Netflix for some time.
NASDAQ: NFLX
Key Data Points
2. $3 billion in free cash flow this year
Management expects free cash flow to climb higher this year on the back of solid revenue growth.
The company generated $1.6 billion in free cash flow in 2022, and it expects to nearly double that amount in 2023, reaching $3 billion. Driving that free cash flow is the expectation for a reacceleration in revenue growth. Management expects just 4% revenue growth in the first quarter, but that number should improve throughout the year.
Additionally, the company plans to keep its cash content spending around the same level as the last few years, at $17 billion. Without a substantial bump in content costs, its biggest cash expense, more of that revenue can flow into Netflix's balance sheet.
The company's capital allocation plans remain unchanged, and management says it will likely resume its share repurchase program this year, returning some of the excess cash it's generating to shareholders.
3. Increased operating margin outlook
Like the rest of the streaming competition, Netflix is looking to make its business more profitable.
Management raised its guidance for operating margin by 2 percentage points based on foreign exchange rates at the start of 2022. However, currency fluctuations in the meantime have resulted in a new outlook of 18% to 20%, roughly in line with the outlook at the start of 2022.
Nonetheless, the updated guidance suggests better-than-expected profitability, perhaps from outperformance in subscriber gains last quarter.
Long-term, Netflix expects to be able to continue expanding its operating margin by growing its revenue base and keeping content expenses in line with its margin goal. But with its massive global subscriber base, foreign exchange rates can have a big impact on its operating margin.
4. Account sharing crackdown could cause near-term pain
Netflix will start pushing more subscribers to stop sharing passwords later this quarter.
Management expects near-term pain as it faces some cancellations from the crackdown based on its trials in Latin America.
Some viewers will cancel, "similar to what we see when we raise prices," Peters said on the earnings call. "But then, generally, what happens is ... we'll see folks come on as new subscribers, essentially borrowers creating their accounts or incremental monetization through the extra member that'll happen shortly thereafter."
That's part of the reason why Netflix expects slow subscriber growth in the first quarter. Additionally, management expects a very different pattern for paid net add growth in 2023 as a result, with second-quarter subscriber growth outpacing the first quarter.
5. Advertising is going better than expected
Netflix stood up and launched an ad-supported tier in about six months. And while it may have experienced some bumps in its launch, overall it's going better than management hoped.
Engagement is consistent with similar subscribers on ad-free plans. Most existing subscribers aren't trading down to the ad-supported plan either. What's more, the lower price point appears to be driving incremental subscriber growth. With a price point near the bottom of the industry, the ad-supported tier presents a lot of value for budget-conscious consumers.
Management is extremely optimistic about its prospects in advertising. Over the long run it expects the ads business to generate more than 10% of its revenue. For reference, revenue totaled $31.6 billion in 2022.
A great quarter and a great outlook
Netflix is heading into 2023 with great momentum, and the stock could reward patient investors.
While it may face a bumpy ride getting the advertising business off the ground and cracking down on password sharing, it appears to be moving toward its long-term goals of reaccelerating revenue and expanding its operating margin. The share buyback should add some support for the stock price as well, and cash flow will likely expand further in the years to come.
Even after the stock rallied following earnings, Netflix stock is worth a look.
