Netflix Stock Jumps 8% as Paid Sharing, Pricing Changes Drive Q4 Revenue Beat

Netflix shares jumped over 8% in after-hours trading on Tuesday after the streamer reported higher-than-expected revenue for the fourth quarter of 2023, driven by its paid-sharing initiative and recent pricing changes.

Here are the top-line results:

Net income: $938 million, a 17-fold increase over $55 million in Q4 of 2022.

Earnings per share: $2.11, compared to $2.20 per share expected by Zacks Investment Research.

Revenue: $8.8 billion, up 12.5% from the previous year’s quarter, compared to $8.72 billion expected by Zacks Investment Research.

Subscribers: Netflix added 13.1 million subscribers globally in the quarter to end 2023 with 260.28 million

The latest quarterly results comes as Netflix’s streaming rivals have struggled to reach profitability in their direct-to-consumer divisions and cut back on content spend. Netflix, by contrast, has spent more, cracked down on password sharing and started to increase prices again.

The streamer said Tuesday that linear television’s days are numbered — and further consolidation won’t arrest the decline.

“As our competitors adjust to these changes, it’s logical to expect further consolidation, particularly among companies with large and declining linear networks,” the company wrote in its shareholder letter. “We’re not interested in acquiring linear assets. Nor do we believe that further M&A among traditional entertainment companies will materially change the competitive environment given all the consolidation that has already happened over the last decade.”

However, Netflix expects the streaming industry to remain highly competitive due to franchise strength and programming expertise within traditional entertainment companies, ongoing heavy investment from large tech players like YouTube, Amazon and Apple, and broader competition for people’s time, including gaming and social media.

The company said it would continue to invest in its content slate with a “high single digit percentage” year-over-year increase in non-cash content costs. Netflix has previously forecast that it would spend around $17 billion on content in 2024.

On Tuesday, the company inked a 10-year, $5 billion deal with TKO Group Inc. that will see the streamer air WWE’s popular “Monday Night Raw.” Starting in January 2025, Netflix will also become the international home of all WWE content in the U.S., Canada and Latin America, with additional regions to be added over time. That includes “Raw” as well as other weekly shows “Smackdown” and “NXT” and premium live events, including “WrestleMania,” “SummerSlam” and “Royal Rumble.”

Netflix Tops 260 Million Subscribers Globally

Netflix added 13.1 million subscribers during the fourth quarter for a total of 260.28 million, it’s second-best quarter ever for sign-ups since the COVID-19 pandemic-related surge during the fourth quarter of 2020.

The figure includes 80.13 million in the U.S. and Canada, 88.81 million in the Europe, Middle East and Africa region, 46 million in Latin America and 45.34 million in the Asia-Pacific region.

The company recorded revenue of $3.93 billion in the U.S. and Canada, $2.78 billion in the EMEA region, $1.1 billion in Latin America and $963 million in the APAC region. Average revenue per user grew 3% year over year to $16.64 in the U.S. and Canada and $$10.75 in the EMEA region and 4% year over year to $8.60 in Latin America, but fell 5% year over year to $7.31 in the APAC region.

Netflix reported net income of $938 million, which included a $239 million non-cash unrealized loss from a foreign exchange calculation on Euro-denominated debt due to depreciation of the U.S. dollar against most currencies. Operating income came in at $1.49 billion for the quarter, with an operating margin of 16.9% Netflix generated net cash of $1.66 billion and free cash flow of $1.58 billion during the quarter.

Paid Sharing and the Ad Tier

In its shareholder letter, Netflix said that paid sharing is now the “normal course of business” and will allow it to grow and more effectively penetrate an addressable market of about 500 million connected TV households (excluding China and Russia). The streamer expects that addressable market to increase over time as broadband penetration rises.

The ad tier, which Netflix executives have previously said would not be material to earnings in 2023, has surpassed 23 million monthly active users globally and now accounts for 40% of all sign-ups. The offering’s base grew by nearly 70% quarter over quarter, supported by product improvements and the phasing out of Netflix’s Basic plan for new and rejoining members.

The ad tier is currently available in 12 countries, including the U.S., Canada, Australia, Brazil, France, Germany, Italy, Japan, Korea, Mexico, Spain, and the United Kingdom.

“I would say, never say never on expanding beyond that, but it’s worth noting that the countries that we are currently operating in represent about 80% of global ad spend,” co-CEO Greg Peters told analysts Tuesday. “So we’re already working in the spaces where there’s the majority of opportunity. We’ll see in the fullness of time, but I’d say we’ve got years of work ahead of us to take the ads business to the point where it’s a material impact to our general business.”

The company also hinted at the potential for future price increases. In October, it hiked its Basic plan in the U.S. to $11.99 a month — an increase of $2 a month — and its Premium plan to $22.99 a month — an increase of $3 a month.

“As we invest in and improve Netflix, we’ll occasionally ask our members to pay a little extra to reflect those improvements, which in turn helps drive the positive flywheel of additional investment to further improve and grow our service,” the company said.

Netflix said it would retire the Basic plan in some of the countries where its ad tier is available, starting with Canada and the United Kingdom in the second quarter.

Looking ahead to the rest of 2024

Looking ahead, Netflix expects “healthy double digit” revenue growth for full year 2024, driven by continued membership growth and improvement in average revenue per paid membership as it adjusts prices. The company also said it would continue to invest in and build its ads business.

“We expect strong growth in 2024 but off a small base so it’s not yet a primary driver of our overall revenue growth,” the shareholder letter stated. “Our aim is to make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond.”

In the first quarter of 2024, Netflix anticipates revenue to grow 13.2% to $9.24 billion and net income of $1.98 billion, or earnings of $4.49 per share. Paid subscriber additions are expected to fall in the first quarter, but be up compared to 1.8 million additions in the first quarter of 2023. It also increased its 2024 full-year operating margin forecast to 24%, up from a range of 22% to 23%, citing a weaker U.S. dollar and a stronger-than-forecast fourth quarter performance.

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