PL Sector Report: Broadcasting - Password crackdown lifts net adds of Netflix
Broadcasting - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd
Password crackdown lifts net adds of Netflix
Key highlights (refer exhibit 1 for more details) from 2QCY23 results of Netflix are as follows:-
♦ Ended the quarter with 238mn paid memberships. Net adds stood at 5.9mn buoyed by crackdown on password sharing.
♦ Revenue was up 2.7% YoY to US$8.1bn with OPM of 22.3%.
♦ Launched paid sharing in 100+ countries in May (representing more than 80% of revenue base). To launch paid sharing in remaining countries from today.
♦ Guidance for 3QCY23: Revenue of US$8.5bn with OPM of 22.2% and net income of US$1.6bn.
♦ Targeting OPM of 18-20% in CY23.
♦ Revenue growth will accelerate in 2HCY23 amid improved monetization from paid sharing and steady growth from launch of ad-supported plan.
♦ Phased out basic ads free plan in Canada. Same is to be followed in the US and UK.
Exhibit 1: Brief financial and operational highlights of Netflix
| Particulars | Q2CY22 | Q3CY22 | Q4CY22 | Q1CY23 | Q2CY23 | Q3CY23E |
| Revenue | 7,970 | 7,926 | 7,852 | 8,162 | 8,187 | 8,520 |
| YoY Growth | 8.60% | 5.90% | 1.90% | 3.70% | 2.70% | 7.50% |
| Operating Income | 1,578 | 1,533 | 550 | 1,714 | 1,827 | 1,890 |
| Operating Margin | 19.80% | 19.30% | 7.00% | 21.00% | 22.30% | 22.20% |
| Net Income | 1,441 | 1,398 | 55 | 1,305 | 1,488 | 1,580 |
| Diluted EPS | 3.2 | 3.1 | 0.12 | 2.88 | 3.29 | 3.52 |
| Global Streaming Paid Memberships | 220.7 | 223.1 | 230.8 | 232.5 | 238.4 | NA |
| YoY Growth | 5.50% | 4.50% | 4.00% | 4.90% | 8.00% | NA |
| Global Streaming Paid Net Additions | -1 | 2.4 | 7.7 | 1.8 | 5.9 | NA |
Source: Netflix Note: Q3CY23E figures refer to management guidance
Business model of Netflix has undergone a shift over the last few quarters amid launch of:-
(1) Paid sharing
(2) Ad-supported plans
Hence, we highlight key developments on these 2 aspects below:-
(1) Progress on paid sharing plans: In May, Netflix launched paid sharing in 100+ countries representing 80% of its revenue base. The plan is to launch paid sharing in remaining countries (including India) from today. Revenue in each region where paid sharing was launched is higher with sign-ups exceeding cancellations indicating borrower accounts are migrating to either full paying memberships or coming into the paid universe via add-on member feature.
Our view: In India, the monthly basic, standard and premium plans are priced at Rs199/Rs499/Rs649 respectively. With extra member option not being available in India apparently it appears that users will have to sign up fresh to access content. A borrowed account was already hooked onto content and there is a strong possibility of paid conversion (trend is evident in global markets as well) boosting overall revenues of Netflix. However, given India is a price sensitive market, performance over actual conversions remains to be seen.
(2) Update on ad-supported plans: Membership of ad-supported plans has doubled since 1Q, however, given the base is low contribution to overall revenue is not material. Further, Netflix has decided to discontinue the basic ads-free plan in Canada and the US & UK would soon follow suit. Over the long term, ad supported business is expected to contribute 10%.
Our view: Phasing out the basic plan would basically sort the customers in 2 buckets. If the customer opts for a lower priced ad-supported plan (USD 6.99 in the US, GBP 4.99 in UK and CAD 5.99 in Canada) reach will get widened (more eyeballs from advertisers standpoint) resulting in better yields. However, if the customer opts for a higher priced standard plan ARPU gets an uplift. Performance of this strategy will be eyed in upcoming quarters.