Netflix's Q1 2023 Financial Report: Successful Returns and Broad Rollouts

With Moody's recent upgrade, Netflix achieved investment-grade status, making it the leading streaming service based on engagement, revenue, and profit. The company aims to build on its success by seeking to expand operating margin to 18%-20% and to generate at least $3.5 billion of free cash flow in 2023, up from its prior expectation of at least $3.0 billion of FCF.

In Q1, Netflix launched paid sharing in four countries and was pleased with the results. The company is planning a broad rollout, including in the US, in Q2. Revenue grew 4% YoY in Q1, consistent with the beginning-of-quarter forecast, while average paid memberships increased 4% YoY. Operating income totaled $1.7 billion, above the guidance forecast of $1.6 billion, due to ongoing expense management and timing of hiring and content spend.

The company is on track to meet its full-year 2023 financial objectives, with a forecasted revenue of $8.2 billion in Q2, up 3% YoY or 6% growth on an F/X neutral basis. Although the company could have launched paid sharing broadly in Q1, Netflix found opportunities to improve the experience for members and shifted the timing of the broad launch from late Q1 to Q2. While some of the expected membership growth and revenue benefit will fall in Q3 rather than Q2, the company believes this will result in a better outcome for both members and its business.

Netflix also highlighted its focus on being more sophisticated around pricing to offer a range of price points and feature sets to suit consumers' differing needs. Initially, when the company launched globally in 2016, it took a fairly uniform approach to pricing across most countries, given its focus on early adopters. However, over time, Netflix has adapted its prices to meet local needs and to further deepen its penetration, including lowering prices in India by 20%-60% in December '21.

These reductions, combined with an improved slate, helped grow engagement in India by nearly 30% YoY, while F/X neutral revenue growth in 2022 accelerated to 24% (versus 19% in 2021). Netflix learned from this success and reduced prices in an additional 116 countries in Q1. While these countries represent less than 5% of the company's FY22 revenue, Netflix believes that increasing adoption in these markets will help to maximize its revenue in the longer term.