Whats the net on #Netflix q4?

As mentioned earlier i’m releasing a load of my recent analyst notes via this blog, here is the one i wrote yesterday, here we go…

If you keep your eyes on the news you will have spotted the Netflix Q4 announcement overnight.  Whilst I appreciate that SVOD (Subscriber VOD) is primarily ad free there are obvious implications for commercial broadcasters as audiences leach out. 

The headline figures are pretty punchy with global subscribers leaping 20% to 167m (this represented an 8.8m increase which natural meant a slowing of annual growth rates ) and with revenue growth accelerating at 30% to 5.2bn in Q4 the direction of travel is good as ARPU rises.  However; further down the financials is where is gets a bit “sticky” with negative trends when it comes to cash generation (or lack of) at significant levels illustrating that the business is having to return to the markets for debt to finance growth.  This combined with a £26bn debt pile (of which £14bn is long term) and cash generation not really improving means you do wonder when operations can be financed without debt. 

In short Netflix is a heavily leveraged business that is currently structured to service debt (both long-term and shareholder) on the basis of subscriber growth only , a bit like Manchester United to paint a sports analogy.  And like Manchester United we’re beginning to see the competitors strengthen and create the potential to take over.

The Hankins hot take – The biggest threat to Netflix is obviously the rise of Disney+ and Apple TV and maybe Amazon Prime if it gets its act together.  Amongst all the Household views related to their shows they rather disingenuously report search data showing how many people have watched the new series of The Crown vs The Mandalorian and The Morning show and Jack Ryan.  Based on the stats, I’d estimate a viewing share of circa 80% across these 4 programmes.  This would suggest that a total of 35million watched these shows over a similar 4 week period (28m watched the Crown).  Bearing in mind the penetration of these platforms (excluding the oddity that is Amazon Prime) its not really a surprise, we’ll have to wait and see whether there is cannibalisation or accompaniment but it does demonstrate the current scale advantage of Netflix. 

The strength of content is clearly a factor and the generation of penetration driving content vs filler content.  I recently heard the lovely phrase “Netflix is the worlds biggest producer of TV movies” which is a bit of faint praise, however these TV movies are very well produced and cost a lot of money; you have to question whether shows like 6Underground really drove new users to the platform, as amusing as Ryan Reynolds is (although 80m+ households did try to view it which means it was broadcast to 50% of total subs = retention play). 

This is the bind Netflix find themselves in and as they pursue aggressive growth across multiple entertainment categories the risks increase, needing as they do to satisfy current users and attract new ones.  They have recently moved into animation and are producing more and more locally produced shows, utilising local talent, which puts them directly in the path of existing broadcasters/producers at a local level (its why ITV is seen as a potential purchase for Netflix).  Something of  interest here is the reference to the BBC.  The BBC are engaged in a strategic partnership of sorts with Netflix (amongst others) but there is clear admiration of the iPlayer as its referred to as a model for content referral.  The commercial opportunities for the BBC will come into greater focus now that Tony Hall is leaving but this reference is another signal that we have a jewel in this institution and its worth protecting. 

On the whole though the worry is the treadmill that Netflix are on suggests no real change in financials trajectory and with the rise of other streaming services I see ARPU declining as part of a price war.  Netflix changed the market but now the market has responded and we’ll find out whether they have the strength to maintain their position or whether one of the truly BIG boys fancies buying them out.  The content arms race is only going to increase which spells further acceleration of the flight from traditional players.  I envisage a rapid fragmentation of content followed by a swift return to aggregation with fewer players remaining as consumers fight back against the “Faff”, we’ll see more actions like those Sky has instigated (Netflix is accessible direct on platform whilst HBO is solus) as intermediaries use a “one platform for all your content needs” as a clear hook for their acquisition needs.

I added the following as a raft of questions on whether I thought Netflix would start opening their platform to advertisers like Sky do in the UK

https://www.livekindly.co/ben-jerrys-just-launched-a-vegan-netflix-and-chilld-ice-cream-flavor/  – this is more likely in the short term.  Product placement and licensing.

Advertising for Sky is free money as they make enough from other avenues.  They also have their broadband offering and mobile offering now too.

The challenge is measurement on Netflix and real scale for advertising.

Estimated subs in the UK are 11.5m but growth is slowing.  This is less than Sky.  How much are you willing to pay for a pre-roll on self-reported platform?  Knowing that 2 mins in they could drop out.  We all know the problems with Facebook and Youtube. We’ll also find out how few of their huge programming investments actually get viewed.

https://www.statista.com/statistics/529734/netflix-households-in-the-uk/

Apple and Disney are unlikely to want to put advertising on their platforms.  Can Netflix risk it in the short term?

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Publishing stuff and the #HankinsHotTake

As part of my professional role I’ve begun (over the last 18 moths or so) to provide a viewpoint on various companies performance, much like the city analysts do.  I’ve tended to focus on Retail but also delve into other stuff i can find. I’ll be posting the recent archive but I thought i’d pop my views on ASOS here. These are typically short email based notes, so they are designed for that format rather than the longer form blog post. Caveat is that i’m not a trained financial analyst and all opinions are my own. Here goes…

Another day, another retailer and this time it comes to the doyen of the digital fashion retail work, ASOS.

The headlines are certainly impressive with the UK delivering 18% growth YoY.  Its worth remembering that there was horror from the city when they only delivered 15% in 2018 but after the significant investments in distribution internationally its interesting to note orders were up 20% at a group level (also reflected in revenue up 20%).  Margin is under pressure though due to the increased costs of rolling out in the States and likely discounting.

The Hankins Hot Take – ASOS look as though they’ve weathered the storm of the last couple of years (including an op profit reduction of 66% yoy in 2019) but its worth reminding ourselves that much of this has been their own doing.  The reason for a couple of profit warnings hasn’t been significant reduction in sales growth/consumer demand, rather a sizable raft of capital investments including the development of a US distribution hub and automisation of the EU and UK hubs.  This has been a cost based decline.  The new corporate structure of C-suit level roles and the arrival of Adam Crozier is an attempt to prevent this lack of control and governance in the future.  On the positive note though the difficult and required fulfilment improvements have occurred with a follow though to rate-of-growth although this has made a dent via the debt figure of c£90m a swing of near -£150m, the cash generative ability of the business does need to rise if this level isn’t going to increase.

Reviewing their plans for 2020 and beyond there is quite a lot of effort going into “ASOS design” and unique product offerings, both intended to defend against the threat of BooHoo et al,  whilst there is also a clear aping of their marketing approaches with suggestions that both paid-for influencers and CRM loyalty programmes will be the key channels to driving a young audience growth.  The falling margins do signal a potential point of weakness though, under-25’s are less affluent than an older cohort which means that to attract them a further cut in margins should be expected.  ASOS have always been towards the lower end of the market (price-wise) but continued margin pressure is likely to be frowned upon.  This is bought into focus by the barnstorming Black Friday performance, a proven profit gouge but also an impossible to avoid event.  All in all a decent period but with clear weaknesses signalled.