Netflix (NFLX Stock) storms up the hill in Q4, hastings steps down as co-CEO

The last few months have been positive ones for the Netflix share price, having hit 5-year lows back in May last year, the shares have surged over 75% since then, although they are still over 50% below the record highs seen in 2021.

When the company reported in Q3 there was some scepticism that the addition of an ad-tier might cannibalise their existing user base, as the streaming market becomes ever more competitive. One of the big concerns for investors has been how Netflix, which doesn’t have any other revenue streams will be able to cope against its deeper pocketed rivals of Amazon, Disney, Apple and now Paramount.

Nonetheless management expressed confidence that they could finish the year on a high with an expectation that they would be able to deliver a strong final quarter, saying that they expected to deliver $7.78bn in revenues.

Net income was expected to see a fall to $163m or $0.36c a share, and operating margin to fall to 4.2%, down from 8.2% a year ago. Subscriber numbers were also expected to rise by 4.5m to a new record of 227.6m.

The question that was being asked given the solid rebound in the share price in the last few months was whether Netflix would be able to deliver the goods, and last night’s results answered that question emphatically with a resounding yes, certainly as far as subscribers were concerned, helped by content like the Knives Out film, Glass Onion, and the surprise Addams Family spin-off, Wednesday.

Q4 revenues beat expectations, coming in at $7.85bn, as did paid subscriber numbers which blew through forecasts, coming in at 7.66m rising to 230.75m, an increase of 4% year on year, with 3.2m coming from the EMEA region.

Having finished the day lower yesterday, last night’s results saw the share price rebound strongly in after-hours trading, with the big test whether it can sustain that move when US trading reopens later today.

With such a big increase in subscriber numbers it's perhaps surprising that revenues weren’t higher, which suggests that perhaps there was some cannibalisation because of the roll-out of the new ad tier service.

Profits on the other hand came in short at $0.12c a share, or $55m, which the company put down to a $462m unrealised loss on their euro non-denominated debt due to the depreciation of the US dollar against the euro during Q4.

Operating margin came in at 7%, which was at the upper end of expectations, and unlike Q4 last year Netflix was able to deliver positive cash flow in Q4 of $332m.

Total revenue for 2022 came in at $31.62bn, while operating expenses rose to $25.99bn cutting annual operating margin to 17.8% from 20.9%.

For Q1 23 Netflix says it expects to generate revenue of $8.17bn, and profits of $1.27bn or $2.82c a share.

As indicated in the Q3 shareholder letter Netflix is no longer offering guidance on subscriber numbers, but that it would be rolling out paid sharing in Q1, which might prompt some cancellations in the short term, as it looks to crack down on password sharing.

The company also announced that co-CEO Reed Hastings would be stepping down, and taking up the position of executive chairman, while Greg Peters would take up the vacant co-CEO position alongside Ted Sarandos.