Mumbai: US and global OTT platform Netflix has said that for fiscal 2024, it expects revenue growth of 13-15%. It now expects FY24 operating margin of 25% up from the prior forecast of 24%.
In Q1, revenue grew 15% year over year, or 18% on a foreign exchange (F/X) neutral basis , driven primarily by membership growth as well as pricing. ARM rose 1% year over year, or 4% on a F/X neutral basis. Revenue was above guidance as paid net additions (9.3M vs. 1.8M in Q1’23) were higher than had been forecast. For Q2’24, it forecasts revenue growth of 16%. But it expects paid net additions to be lower in Q2’24 versus Q1’24 due to typical seasonality.
Operating income in Q1’24 totaled $2.6 billion (versus $1.7 billion in Q1‘23) — a year over year increase of 54%. This was also above the forecast primarily due to higher than anticipated revenue and the timing of its content spend. Operating margin of 28% grew seven percentage points year over year (vs. 21% last Q1). EPS for the first quarter was $5.28 vs. $2.88 last year and its $4.49 forecast.
The Long Term Plan: It pointed out that to sustain healthy growth long term, it must continue to:
- Improve the variety and quality of entertainment — with more, great TV shows and movies, a stronger slate of games and must-watch live programming;
- Innovate in product and marketing — so fans can more easily discover, immerse themselves in and talk about the stories they love, fueling fandom and the Netflix Effect;
- Tap into additional revenue and profit pools — in particular scaling ads to become a more meaningful contributor to our business in ‘25 and beyond.
It explains that it has built a hard to replicate combination of a strong slate, superior recommendations, broad reach and intense fandom, which drives healthy engagement on Netflix. Improvement in these key areas is the best way to delight members and continue to grow the business.
Netflix added that success in streaming starts with engagement. When people watch more, they stick around longer (retention), recommend Netflix more often (acquisition) and place a higher value on the service. It’s why it has been providing progressively more information on engagement, starting with its Top 10 weekly and most popular lists and more recently its bi-annual report into viewing on Netflix (which covers 99% of all video watch time on the service). This it claims is more information than any of its competitors provide, and it expects to provide even more over time.
Almost 270 million households across 190+ countries now subscribe to Netflix. With more than two people per household on average, it said that it has an audience of over half a billion people. No entertainment company has ever programmed at this scale and with this ambition before. To satisfy such a large audience, it needs many great stories that appeal to lots of different tastes — and by great, it means movies, series and games members love. This means that it takes an audience centric approach to quality.
As noted in the last letter to shareholders, the two priorities in ads are to scale member base and to build out capabilities for advertisers. It said that it has made progress on both fronts in Q1. Ads membership grew 65% quarter on quarter (after rising nearly 70% sequentially in each of Q3’23 and Q4’23) with over 40% of all signups in its ads markets coming from the ads plan. For advertisers, it continues to focus on measurement solutions, including new partnerships with Kantar and Lucid for brand awareness and recall, and Nielsen Catalina Solutions for sales lift and it is working to build out its sales capabilities.
As noted in previous letters, it is focussed on revenue and operating margin as the primary financial metrics — and engagement (i.e. time spent) as its best proxy for customer satisfaction. In the early days, when it had little revenue or profit, membership growth was a strong indicator of future potential. But now it says that it is generating very substantial profit and free cash flow (FCF). It is also developing new revenue streams like advertising and the extra member feature, so memberships are just one component of growth.
In addition, as it has evolved pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact. It’s why it stopped providing quarterly paid membership guidance in 2023 and, starting next year with the Q1’25 earnings, it will stop reporting quarterly membership numbers and ARM.
