Profitability Analysis

The Profitability section of this website extensively analyzes Netflix's profitability measures compared to five different competitors using the database S&P Capital IQ. According to their recent 10K: Annual Report for the end of 2022, their net income decreased by 12.9% due to rising costs and inflation that left consumers to cancel their memberships in large quantities and need help retaining members. To compensate for the decrease in membership, Netflix had to increase spending on its marketing and advertisements, and the expenses regarding those were rather significant and high at the end of 2022. This could be adverse regarding profitability in later years because this strategy only retains members for the short term but could see an overall decrease in subscribers in the long term.

The decreasing net income, rising costs, inflationary pressures leading to membership cancellations, and increased spending on marketing and ads have negatively impacted Netflix's profitability in the short term. However, these factors may prove even more detrimental in the long run if they result in an accelerating decline in subscribers. Though Netflix is losing some market share to competitors, it remains a dominant and recognizable force in the streaming industry. While the current headwinds are concerning, Netflix boasts strong financial health overall and is well-positioned to weather this storm given its trusted brand name and wealth of high-quality original content. If Netflix can retain subscribers by continuing to provide value and explore alternative revenue streams, the company can regain profit momentum and maintain its status as an industry leader over the long term. 

Netflix’s Latest Financial Disclosure: Insights for Future Performance (10-Q and Quarterly Analysis)

Evaluating these aspects of the latest 10-Q filings allows us to gauge if Netflix’s 2022 results have reversed course in 2023. It offers an updated look at the company’s financial fitness. 

The 10-Q disclosures will provide updated subscription revenue growth trends to assess whether customer losses have decelerated compared to declining trends mentioned in introduction. In addition, the 10-Q margins and cash flows will reveal whether price hikes and cost optimization have restored Netflix's profit momentum in the near term.

Quarter 1 (Q1):

In Q1 2023, Netflix reported revenue of $8.2 billion, up 4% year-over-year. This was driven by a 5% increase in average paid streaming memberships to 233 million, offset slightly by a 1% decline in average revenue per user (ARPU) to $11.22. Operating income totaled $1.7 billion, up from $1.6 billion last year, while operating margin held steady at 21%. Free cash flow for the quarter was $2.1 billion compared to $47 million in Q1 2022. The improved cash flow reflects lower content spending amid production delays. Overall, Q1 results indicate Netflix reversed the troubling trends of subscriber losses and decelerating growth seen in 2022. Steady subscriber additions combined with early progress on monetization initiatives like paid account sharing and advertising provide optimism, though economic uncertainty persists.

Quarter 2 (Q2):

Netflix delivered Q2 revenue of $8.2 billion, up 3% year-over-year on an as-reported basis and 6% on a foreign exchange neutral basis. Streaming paid memberships increased by 6 million to 238 million, while ARPU declined 1% year-over-year. Operating income grew to $1.8 billion as operating margin expanded to 22%. The company generated $1.3 billion in free cash flow vs. breakeven last year thanks to lower cash content spending stemming from production delays. Results demonstrate resilience with accelerating subscriber growth and margins despite economic headwinds. Progress on paid account sharing rollout across 100+ countries and early advertising traction provides confidence Netflix can drive improved monetization.

Quarter 3 (Q3):

In Q3, Netflix posted revenue growth of 8% year-over-year to $8.5 billion, slightly exceeding guidance on higher-than-expected subscriber additions. Paid memberships rose 10% to 247 million, while ARPU dipped 1% affected by plan mix shifts and limited price hikes. Operating income hit $1.9 billion, up 25%, driving operating margin to 22.4%. EPS amounted to $3.73. The company generated $1.9 billion in free cash flow vs. $472 million last year as content spending moderated amid strikes. Results confirm Netflix's turnaround is sustainable with accelerating top line growth, record subscriber additions, rising profits and robust cash generation. Success of paid sharing rollout and 70% quarterly jump in ad tier subscribers provides optimism Netflix can drive improved monetization to fuel continued content investments over the long term, though competition persists.

Basic Profitability Ratios - (Comcast, Dish, and Netflix) 

Operating Margin: 

Analyzing operating profit margins, we see a similar trend of Netflix outpacing comparative industry averages and establishing a clear lead over competitors like Dish Network and Comcast for most of the 2018-2022 period. In 2018, Netflix achieved a 10% operating margin compared to a single digit industry average around 6%. Netflix expanded its lead in 2019 and 2020, peaking at 21% operating margin in 2021 while the industry averaged less than 5% as competitive pressures increased spending and cut margins. In 2022 Netflix faces more competition, declining to 18% but still more than triples the industry average operating margin.

Compared to Dish Network, Netflix’s operating margin advantage is again clear. Dish achieved between 12-19% operating margins from 2018-2022 – solid performance but consistently below Netflix over that five year span as Netflix benefited from scaling content production and marketing costs over a much larger subscriber base. Interestingly in 2022 as Netflix’s margin declines, Dish improves to 18% - nearly drawing even for the first time in this period.

Comcast’s operating margins demonstrate the impact of attempting to shift from cable to streaming. Comcast held the operating margin advantage in 2018 at 16% compared to Netflix’s 10%, owing to its strong cable market position. But Comcast’s margins declined over 2019-2021, dropping as low as -86% in 2020 as losses mounted from the Peacock investment. In 2022 Comcast improved to 3% operating margin but still trails Netflix by a wide gap. This shows the challenges traditional media companies face pivoting business models to compete with leading streaming platforms like Netflix.

Net Profit Margin:

Examining net profit margins, Netflix again stands out versus industry averages and competitors. Netflix generated net margins in the 8-17% range from 2018-2022, while the industry average net margin declined from 10% down below 5% over that same period as fragmentation intensified competition for subscription revenue. In 2021, Netflix peaked at a 17% net margin - 3X the industry average. In 2022 Netflix faces more competition, reporting 14% net margin but still outpacing the industry average.

We see the same pattern when comparing Netflix’s superior net margins to Dish Network and Comcast. Dish managed relatively steady net margins between 11-14% from 2018-2022, consistently trailing Netflix over that period. Comcast demonstrated volatile performance, with 12% net margin in 2018 giving way to heavy losses in 2019-2021 driven by Peacock related costs. Comcast rebounded to a -11% net loss in 2022 as Peacock cuts losses, but still falls well short of Netflix’s leading net profitability.

In conclusion, analysis of gross, operating and net profit margins over 2018-2022 shows Netflix has maintained substantial profitability advantages versus industry averages and competitors like Dish Network and Comcast. As the streaming pioneer and leader, Netflix has ridden its first mover status and subscriber scale to achieve consistently higher margins across the board. However, 2022 saw initial signs of erosion in Netflix’s margin leadership as competition rises. Though still the benchmark for streaming financial performance, Netflix faces challenges sustaining these margins long term against hungry competitors like Comcast looking to emulate their success.

Gross Profit Margin: 

Over the past 5 years, Netflix has maintained a higher gross profit margin than the overall entertainment industry average. In 2018, Netflix's gross margin was 37% compared to the industry average of around 25%. This gap widened in 2019 with Netflix at 38% and the industry average declining to 23% in a more competitive market. In 2020 and 2021, Netflix continued to lead with margins of 39% and 42% while the industry averaged 22-23%. In 2022, Netflix dropped to 39% but still exceeds the industry average that has fallen below 20% with more streaming fragmentation.

Compared to competitors like Dish Network, Netflix’s gross margin dominance is even more apparent. Dish’s gross margin has remained consistent in the low 30% range from 2018-2022, generally 10-15 points below Netflix’s margin each year. Netflix’s industry leading margins likely reflect its position as the streaming market leader and its ability to spread content investments over a very large subscriber base. Its margins also benefit from its direct-to-consumer model compared to Dish’s wholesale distribution model.

Comcast’s margins present an interesting comparison point as a leading cable provider that has invested heavily in its own streaming platform, Peacock. Here we see Comcast gross margins generally trailing both Netflix and Dish over 2018-2022 in the 30-35% range as it balances declining pay TV margins with streaming investments. But in 2022, Comcast improved to 48% gross margin, nearly matching Netflix. This indicates Comcast’s success driving better margins from its streaming platform even as Netflix faces more competition. But Netflix still maintained industry leading profitability over 2018-2022 as pioneers of the direct-to-consumer streaming model.

Return on Assets: (ROA) 

Examining return on assets, we again see Netflix outperforming comparative entertainment industry averages from 2018-2021 thanks to superior operating efficiency. Netflix ROA ranged from 13-18% over that period, peaking at 18% in 2021. By comparison, the industry ROA declined from 11% in 2018 down to just 2% by 2022. This illustrates how fragmentation and inflationary content spending has rapidly degraded broader industry asset efficiency and profit potential.

Versus Dish Network, Netflix once more achieved significantly higher returns on assets of between 13-18% from 2018-2021, while Dish posted solid but inferior ROA of 6-10% over the same period. However, as Netflix's metrics regressed in 2022, Dish boosted ROA to 10% nearly equaling Netflix's 11% - the closest Dish has come to matching Netflix asset efficiency. This suggests Netflix's ROA dominance could be threatened without continual subscriber growth.

Comcast posted high single digit ROA between 2018-2020, outpacing the industry. But heavy losses tied to Peacock cut Comcast's ROA all the way negative to -9% in 2021. Comcast again posted negative -4% ROA in 2022 due to streaming losses. So while assets like broadband infrastructure keep Comcast ROA above industry levels so far, attempts to compete with Netflix have been a significant drag as their long standing cable business model evolves.

To summarize, Netflix has made substantially more productive use of assets than peers to drive strong ROA results, fueling market share growth and continued content reinvestment over 2018-2021. However across the board, 2022 metrics point to the potential erosion of Netflix's once untouchable level of operating efficiency and asset utilization as subscriber momentum stalls amid rising competition. Sustaining the high watermark returns in ROA, ROE and RNOA that built Netflix into a streaming juggernaut gets only harder in coming years.

Return on Equity: (ROE) 

Over 2018-2022, Netflix delivered far higher return on equity than entertainment industry averages, demonstrating its ability to efficiently employ shareholder capital to generate profits. Netflix ROE ranged from 23-32% over that period, spiking as high as 32% in 2021. By contrast, industry average ROE declined from 18% down to just 5% by 2022 as competitive streaming fragmentation intensified.

Compared to Dish Network, Netflix generated consistently and substantially stronger ROE performance from 2018-2021, with gaps ranging from 6-20 percentage points higher ROI delivered to Netflix shareholders. Dish has delivered double digit ROE between 12-17% since 2018, representing solid capital efficiency but still trailing Netflix by a wide margin during their peak years. However, as Netflix's ROE declined to 22% in 2022, Dish held steady at 13% - nearly matching Netflix for the first time.

Comcast presents a more volatile ROE comparison, as its streaming pivots have created profit fluctuations and losses in recent years. Comcast held the advantage in 2018 at a 15% ROE when Netflix reported 23%. But heavy losses associated with Peacock then contributed to a -77% ROE for Comcast in 2020 and -126% in 2021. Comcast rebounded to -227% in 2022 as losses mount, while Netflix generates over 20% return for shareholders. This illustrates the challenges even market leading cable companies like Comcast face shifting to competitive streaming distribution while rewarding shareholders at the same time.

Dupont Analysis:

Netflix's return on equity (ROE) was very strong in 2020 at 32%, driven by an increase in net profit margin and higher asset turnover compared to prior years. Netflix's ROE declined in 2021 and 2022, falling to 22% and 17% respectively. We can analyze the drivers of Netflix's ROE over the past 5 years using the DuPont equation:

ROE = Net Profit Margin x Total Asset Turnover x Equity Multiplier

Net Profit Margin: Netflix's net profit margin increased from 8% in 2018 to a peak of 17% in 2020, indicating that Netflix was generating significantly higher profits from its revenues in 2020 compared to prior years. This was a major driver increasing Netflix's ROE in 2020. However, net profit margin declined to 14% in 2021 and 12% in 2022 as costs rose faster than revenues. The lower net profit margins have contributed to the declines in ROE in 2021 and 2022 compared to 2020.

Total Asset Turnover: Netflix's total asset turnover measures how efficiently it uses assets to generate revenue. Asset turnover was strong in 2020 at 67% but has declined since then, falling to 65% in 2021 and a 5-year low of 45% in 2022. The declining asset turnover indicates Netflix is generating less revenue per dollar of assets than it did historically, contributing to weaker return on equity. Higher investment and potentially some inefficiency in asset deployment is likely a factor.

Equity Multiplier: Netflix's equity multiplier, which measures financial leverage, declined sharply over the 5-year period from 496% in 2018 to 234% in 2021, before rising again to 338% in 2022. The high leverage in early years significantly boosted Netflix's ROE. However, as leverage declined significantly by 2021, it reduced one of the key historical contributors to Netflix's ROE. The rebound in leverage in 2022 helped increase ROE slightly that year.

In summary, Netflix's exceptional ROE in 2020 was driven by a high net profit margin, strong asset turnover and very high historical financial leverage. Asset efficiency and profitability declined in 2021 and 2022 compared to 2020 peaks, while leverage effects also weakened. These DuPont drivers explain the decline in Netflix's overall ROE the past two years versus the 2020 highs, though performance improved slightly in 2022. Maintaining profit margins and asset efficiency while optimizing leverage will be key for Netflix to restore superior returns on equity going forward.

Return on Net Operating Assets: (RNOA) 

Analyzing return on net operating assets, Netflix again shows leading efficiency versus its peer group - averaging over 60% RNOA each year from 2018-2021 based on average net operating assets. This declined to 46% in 2022 but still nearly doubled the industry average. In contrast, the overall entertainment industry RNOA averaged just 15-30% over 2018-2022 as content costs and competition weighed on asset efficiency across traditional media and streaming companies.

Compared to Dish Network, we again see Netflix generating significantly higher returns, with RNOA surpassing Dish's 37-49% return on assets by between 27 and 46 percentage points each year over 2018-2021. However, Dish improved to 52% RNOA in 2022 as Netflix faces more competition. This emphasizes Dish's stability even as Netflix comes back towards the field after years of high flying growth and margins.

Comcast actually compares favorably to Netflix in RNOA in 2018, achieving 75% return on net operating assets vs Netflix's 81% that year, owing to its extensive cable infrastructure. But this flips as ComcastContent struggles with streaming investments, dragging RNOA down to as low as 12% in 2020 and 2021 compared to over 60% for Netflix. Comcast recovers to 52% RNOA in 2022, but after dominating in 2018 the flip flop illustrates challenges converting cable assets to streaming returns.

In conclusion, over 2018-2022 Netflix has delivered exceptionally strong return on equity and return on net operating assets compared to entertainment industry averages and competitors like Dish and Comcast. But 2022 saw the first signs of regression towards the mean for Netflix as competition rises. Sustaining market leading returns in the maturing streaming landscape to reward shareholders presents a new challenge for Netflix leaders after years of clear dominance in profitability metrics.

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