Netflix Inc. ended its biggest year in company history with a bang, adding more customers than expected and saying it no longer needs to borrow money to build its entertainment empire.
The world’s leading paid streaming service attracted 8.51 million new customers in the final three months of 2020, helped by the popularity of hit shows such as “Bridgerton” and “The Queen’s Gambit.” That outpaced Netflix’s own forecast and the 6.06 million projected by Wall Street, and sent its shares up 13 per cent in late trading.
The earnings report included two key milestones for Netflix: The company passed the 200 million-subscriber mark for the first time and said its cash flow will allow it to stop relying on debt to fuel its growth. With US$8.2 billion in cash — and a credit line that hasn’t been drawn down — Netflix said it no longer needs external financing. It’s also considering stock buybacks, something it hasn’t done in about a decade.
The pandemic has provided a huge boost to Netflix’s business, forcing people inside and limiting other entertainment options like movie theaters and concerts. The company added 25.9 million customers in the first six months of last year, and ended up adding 36.6 million customers in all — a record.
The company has repeatedly warned that the surge in the first half of 2020 would limit its growth in subsequent quarters — what it calls the “pull-forward” effect. But it found more runway than expected in the latest period.
Netflix’s growth during the last year dispelled two common critiques of the company. Skeptics of Netflix have long identified its debt as a looming disaster, arguing that an economic recession would cripple the company and cause customers to cancel subscriptions en masse.
While Netflix has consistently reported profits, it had to borrow billions of dollars to fund its spending on new programs. It had negative free cash flow of US$3.3 billion in 2019, its worst on record. But since then, it’s turned a corner. Free cash flow will be close to the break-even point in 2021, Netflix said Tuesday. Analysts had projected negative US$619.7 million.
Against that backdrop, Netflix’s debt spree looks like a worthy investment. It borrowed some US$15 billion to boost its market capitalization by more than US$200 billion.
Fending Off Rivals
Critics have also argued Netflix would suffer when rival media companies pulled their most popular titles from the service and created their own competitors. Yet Netflix posted its best performance in the same year that several new rivals entered the fray and Disney+ reached almost 87 million paid subscribers.
“Our strategy is simple: If we can continue to improve Netflix every day to better delight our members, we can be their first choice for streaming entertainment,” the company said in a letter to shareholders. “This past year is a testament to this approach.”
Netflix shares climbed as high as US$568.75 in after-hours trading. The stock rallied 67 per cent last year, but concerns about slowing growth had weighed on Netflix in 2021. Through Tuesday’s close, it was down 7.2 per cent since the start of the year.
Netflix, based in the Silicon Valley town of Los Gatos, California, is leaning more on international markets now that its home market of North America is largely saturated. The service has relied on Europe and Latin America to supply most of its new customers in the last few years, and is just starting to crack Asia.
More than 60 per cent of its customers now live outside the U.S. and Canada, and 83 per cent of its new additions in 2020 came from abroad. Europe supplied 41 per cent of its new customers (almost 15 million people), while Asia added 9.3 customers, the second most.
Netflix has thrived by creating pipelines of new programs from all over the world that appeal to viewers beyond its native tongue. In the fourth quarter alone, Netflix released popular series in German, Korean, Japanese and French.
The English-language “Queen’s Gambit” and “Bridgerton” were both major hits for Netflix. “Queen’s Gambit” was viewed by 62 million households in its first 28 days on the service, while “Bridgerton” is on track to reach 63 million accounts.
But a newer show, released this month, underscores Netflix’s global reach. “Lupin,” a French crime series starring Omar Sy, has become the second-biggest debut in the company’s history. It’s on track to be watched by 70 million households in its first 28 days on the service.
Netflix gave a conservative estimate for the current quarter, when it expects to add 6 million new subscribers. That compares with an average analyst estimate of 7.45 million.