Optimistic results from Netflix, but is it enough?

Overall, satisfactorily results provided by Netflix. However, analysts and investors are focused on subscriber growth, and punishing Netflix for missing the third-quarter target.

Photo by Thibault Penin on Unsplash

During the week of 23 October 2020, Netflix released its results for the third quarter of 2020. Missing their forecast of adding (net) subscribers of 2.5 million globally, by only adding a net of 2.2 million subscribers in the third quarter. Investors did not take the news well, with the share price dropping by as much as 5% on Tuesday 20 October.

Reading through the Q3 results provided some very interesting insights into the business. But the key of that is the operating margin that Netflix operates under. The operating margin is all over the place. Now, this could be expected for a normal studio, as their revenue is only derived after they have made a film or series (Based on how many people go to the theatre or watch the show on different networks). However, Netflix’s model should allow it a bit more control on their margin, as their income is technically fixed, they should be able to determine a budget and margin % and stick to it.

This would have been my expectation as a shareholder and analyst when looking at the results. But, to keep up with demand and stay ahead of competitors (There are many these days), it is understandable that Netflix is still trying to spend as much as possible on new content, and higher quality content. With a couple of big shows on the roster, they are definitely not putting profits before quality.

Source: Netflix Shareholders letter

Overall the results were very pleasing. With revenue increasing 22.7% year on year and overall, for the 2020 year, more subscribers have been added then the average of the last three years. This will mean that Netflix will potentially still beat Analysts full-year expectations and impress.

Source: Netflix Shareholders letter

The Results

Source: Netflix Shareholders letter

From the above illustration, we can see that revenue for the nine months ended 29 September 2020 is up 25% compared to the same period last year. While the more impressive number is the operating income. Up 69% from the same period last year. Operating income was helped with the reduced marketing spend, general and administrative expenses flat and a slightly better margin on Cost of Revenues. Managing their costs resulted in an impressive increase in Operating Income margin from 14.6% to 19.78%.

Net Income increased by 73.49%, mainly due to the Return On Sales margin increasing by 3.38% from 8.71% to 12.09%. This is all very impressive, however, it should not be read alone. We should always consider the impact on the cash flow, as it tells a more accurate story that cannot be as easily manipulated by smart accounting.

Source: Netflix Shareholders letter

Overall, the statement of cash flow paints a very impressive figure. With operating activities returning positive cash flow of $2.5 Billion, compared to the previous year nine months resulting in a negative cash flow of $1.4 Billion.

The cash flow from financing activities is down, which is a good thing. However, Netflix is still raising debt rather than decreasing it to bolster its cash flow position. This is something to be mindful of in the long run.

The boost in Cash Flow is due to the freeze on production that was brought on because of the global pandemic. Therefore, it is wise to not be too optimistic about the cash flow numbers, as Netflix needs to spend on new content (assets) for them to ultimately be able to make future returns.




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Cloud Analytix

Cloud Analytix

Cloud Solution Provider. Passionate about cloud business efficiencies and security.

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