Netflix Inc. is pivoting to a new capital model after closing its first year of being cash flow positive.
Executives signaled that intent as they discussed the company's fourth-quarter 2020 earnings results, the rise of new competition, particularly from The Walt Disney Co., and the lingering impact of the pandemic period on the company's membership growth and productions.
The company posted positive free cash flow of $1.9 billion for 2020, compared to negative $3.3 billion in 2019. For the full year 2021, Netflix expects free cash flow to be around break even, compared to its prior expectation of negative $1 billion to break even.
Combined with its $8.2 billion cash balance and $750 million undrawn credit facility, Netflix said in its Jan. 19 earnings release that it will no longer need to raise external capital to fund its day-to-day operations, and the company plans to maintain about $10 billion to $15 billion in gross debt.
While the company intends to continue to aggressively pursue growth through investment, its cash position will afford it new opportunities to return capital to shareholders, CFO Spencer Neumann said on a same-day webcast.
"We're super proud of where we're at from a free cash flow perspective," Neumann said. "We're putting a premium on balance sheet flexibility. ... If we have excess cash, we'll return it to shareholders through buybacks."
The financial maturity for the company comes after it clocked a record year in membership growth. The coronavirus pandemic accelerated a consumer shift to streaming video, Neumann said. Among its 207.3 million members — with 8.5 million added in the fourth quarter 2020 — the company has improved retention. And while viewing hours have settled lower from the pandemic peak, they are up year over year, he said. These gains came alongside a domestic price increase announced at the end of the year, as well as increased competition with the launch of AT&T Inc.'s HBO Max, Comcast Corp.'s Peacock and the growth of Disney+.
On Disney+, the executives said the stiff competition, including Disney+'s forecast of over 240 million members by the end of 2024, will only benefit consumers.
Co-CEO and Chief Content Officer Ted Sarandos pointed to Christmas Day, where despite film launches from its competitors, Netflix marked one of its biggest launches ever with "Holidate." He also pointed to the success of "The Queen's Gambit," which marked its biggest limited series to date.
Also, while Disney+'s 87 million subscribers, added in its first year of operation, is impressive, Netflix managed to add almost half of that in 2020 net additions, Spencer Wang, head of investor relations, pointed out. Further, about a third of that 87 million also includes the addition of Hotstar to its streaming platform, Wang said.
"It's going to be great for the world that Disney and Netflix are competing show by show and movie by movie. We're very fired up by catching them in family animation and maintaining our lead in general entertainment," co-CEO Reed Hastings said.
The executives also addressed the theatrical model, which came under significant fire through 2020 as theaters shuttered and studios debuted more films on streaming. AT&T's WarnerMedia went so far as to say it will debut its entire 2021 film slate on HBO Max the same day those titles hit theaters. That evolution only benefits Netflix, potentially allowing the company more access to theatrical release, executives said.
"Our biggest issue has been that you have to commit to this very long window of exclusivity to get access to any theaters. That's been the biggest challenge. If those windows are going to collapse and we'd have easier access … to show our films in theaters, I'd love to have consumers be able to make the choice," Sarandos said.
Warner Bros. will provide a good test case for alternative windowing strategy, but that will not get an apples-to-apples test against the traditional theatrical exclusivity model until the pandemic winds down, likely in the second half of the year, Hastings added.
However, he and his colleagues stopped short of saying the company would consider the premium pay-per-view streaming model adopted by some of its competitors.
"We really believe that from a consumer orientation, the simplicity of our ad-free, no-additional-payments, one-subscription model is really, really powerful and really, really satisfying to consumers around the world," Chief Product Officer Greg Peters said.
Looking at the quarterly performance, Netflix ended the period with about 203.7 million members in total, up by about 37 million for the full year and representing a new record for its membership growth. Netflix in October 2020 guided for 6.0 million paid net additions in the fourth quarter.
The company on Jan. 19 forecast another 6.0 million paid net subscriber additions in the first quarter of 2021.
About 860,000 of Netflix's fourth-quarter 2020 additions came from the U.S. and Canada, a notable acceleration from the 180,000 net adds it reported for the region in the third quarter of 2020. The third-quarter growth marked a low point for the region's membership additions in 2020.
Netflix collected $6.64 billion in revenue for the fourth quarter of 2020, up 21.5% over the prior-year quarter. That drove $542.2 million in net income, or $1.19 per share, compared to $587.0 million, or $1.30 per share, in the fourth quarter of 2019.
The S&P Capital IQ consensus EPS estimate for the just-ended quarter was $1.39, or $1.41 on a normalized basis.
For the full year, Netflix reported $2.76 billion in net income, or $6.08 per share, compared to $1.87 billion, or $4.13 per share, in 2019.
The consensus EPS estimate for the full year was $6.28, or $6.33 on a normalized basis.
Shares of Netflix surged up more than 12% in after-hours speculation following the earnings release.
