Netflix Q4 FY2021 Earnings Report Preview: What to Look For From NFLX

Netflix Inc. (NFLX), unlike many companies, has navigated the ongoing COVID-19 pandemic relatively unscathed. Profits have soared as consumers sheltering at home have sharply boosted their viewing of Netflix streaming movies and TV shows during the pandemic. But the company faces major challenges, including slowing revenue growth, rising pressure from major streaming competitors, and rising costs.

Investors will be watching to see how well Netflix is navigating these challenges when the company reports earnings on Jan. 20, 2022 for Q4 FY 2021. Analysts expect the company's earnings per share (EPS) to decline for the first time since the final quarter of FY 2020. Revenue is expected to grow at its slowest pace out of any quarter in at least the past four years.

Investors will also focus on Netflix's global paid streaming memberships, a key measure of its monetizable user base. The company surpassed 200 million total global memberships at the end of FY 2020, but growth has been slowing dramatically over the past year. Analysts expect a slight deceleration in the pace of growth in Q4 compared to the previous quarter.

Shares of Netflix have underperformed the broader market over the past year. The volatile stock has oscillated between outperformance and underperformance throughout much of the last year. And since December, Netflix shares have been badly lagging the market. Netflix's shares have provided a total return of 1.8% over the past year, below the S&P 500's total return of 20.5%.

Netflix Earnings History

Netflix reported Q3 FY 2021 earnings that surpassed analysts' expectations while revenue matched estimates. EPS rose 83.3% compared to the year-ago quarter, continuing a deceleration trend begun in the previous quarter. Revenue rose 16.3% year over year (YOY), its slowest pace in at least the past 15 quarters. The company noted that the amount of streaming content offered in the first half of the year was lighter than usual due to pandemic-related production delays but that its content offerings were already beginning to strengthen.

In Q2 FY 2021, Netflix's earnings beat consensus estimates while revenue just matched. EPS increased 86.8% YOY, slowing from the previous quarter's rapid pace of 138.9%. Revenue grew 19.4% compared to the year-ago quarter, slowing from the previous quarter's pace of 24.2%. Netflix said that its revenue growth was driven by increases in average paid streaming memberships and in average revenue per membership.

Analysts expect EPS in Q4 FY 2021 to decline 31.2% YOY. EPS has only declined in three other quarters in the past four years, and this would be the sharpest decline out of all of them. Revenue is expected to grow 16.1% YOY, which would be the slowest pace of growth in at least 16 quarters. For full-year FY 2021, analysts expect EPS to rise 76.4%, its fastest pace since FY 2018 despite the expected decline in the fourth quarter. Annual revenue is expected to rise 18.9%, which would be the slowest pace in at least the past eight years.

^{Source: Visible Alpha}

The Key Metric

As mentioned above, investors will also focus on Netflix's global paid streaming memberships, also known as global streaming paid subscribers. The metric indicates the number of global users that have signed up and paid for a subscription to receive streaming services. Currently, streaming memberships are Netflix's primary source of revenue. But video streaming has become increasingly competitive in recent years, and Netflix now faces threats from rivals like Apple Inc.'s (AAPL) Apple TV+, Walt Disney Co.'s (DIS) Disney+, Amazon.com Inc.'s (AMZN) Amazon Prime Video, and AT&T Inc.'s (T) HBO Max. To attract new subscribers the company is spending more on content.

Netflix's global paid streaming memberships have grown significantly over the past three years. At the end of Q3 FY 2018, the company had 130.4 million of those memberships. By the end of Q3 FY 2021, they had grown to 213.6 million. However, growth has gradually been decelerating over that same period as the total membership base has widened. Global paid streaming memberships grew 25.4% in the third quarter of FY 2018 but the pace slowed to as low as 8.4% by the second quarter of FY 2021. Growth picked up slightly in the third quarter to a pace of 9.4%. For the coming fourth quarter report, analysts expect a slight deceleration to 9.1% growth. That would be the second-slowest rate of growth in at least 14 quarters for global paid streaming memberships.