Investors had high expectations for Netflixin (NASDAQ: NFLX) fourth quarter earnings report this week. Even though CEO Reed Hastings and his team warned of a slowdown in growth three months ago, the fourth quarter period generally brings an increase in engagement, as people watch more TV and update their streaming equipment over the holidays.
However, Netflix surpassed these high Wall Street targets and set a new annual growth record along the way for 2020. The news was even better on the financial front, which looks set to include cash flow gushing into the foreseeable future.
Let’s look more closely.
Image source: Getty Images.
Almost not just growing
Netflix surpassed the management’s previous forecast, which predicted adding 6 million subscribers. Its real earnings – 8.5 million – almost corresponded to the blockbuster’s 8.8 million boost the company achieved a year ago.
It was a welcome sight for investors concerned that Netflix is close to expanding its global business. Walt Disney after all, it built a huge subscriber platform for its streaming service Disney + in its first year, which may have put pressure on the streaming leader in 2020.
Instead, Netflix added 37 million paying members in 2020, compared to its previous record of 29 million set in 2018. These users remained highly engaged, with a flood of exclusive content attracting a massive audience. The midnight sky, a Netflix movie released in the period, drew 72 million viewers in its first month on the service. Management also said that the series Bridgerton was “immensely popular”, while promising more detailed viewing statistics.
Profits and money
Netflix tried to keep up with the growing profits driven by all that growth, but management was unable to reinvest money into the business quickly enough. As a result, operating margin jumped more than management’s long-term goal of around 3% per year, from 13% to 18% in 2020.
NFLX Cash from Operations (TTM) data by YCharts
Cash flow was also strong, with outflows reaching just US $ 138 million in the quarter, translating into a positive US $ 1.9 billion in the year. This result coincides with management’s forecast for late October, but Netflix’s new outlook makes it clear that the business is on an improving financial trajectory.
Positive cash flow from here
Executives now believe they will reach the cash-flow equilibrium point in 2021 to mark the company’s first year without needing loans since it started its original content push. Cash flow is expected to improve from there, with the help of constantly expanding profitability and growing user base.
Netflix’s short-term forecast predicts a sharp slowdown in subscribers as it goes against the beginning of COVID-19 blockades in early 2019. Management said the company is yet to push its global user base to around 210 million. at the end of March.
Executives suggested significant direct cash returns from share buybacks, probably starting later in the year. But the biggest reasons for shareholder celebrations include the fact that Netflix has clearly established itself as a leader in a competitive industry that is likely to grow for many more years.
Management has had to allocate money aggressively since 2012 to protect and extend this valuable market position. But the huge returns from these successes will begin to appear in 2021 and beyond.